Quantifying forecast contributions to central bank loss functions

Determine a rigorous quantitative framework to assess how inflation forecasts contribute to decision payoffs under specified central bank loss functions, enabling formal evaluation of forecasting models used in monetary policy settings.

Background

The paper emphasizes that forecasts are used to inform policy decisions, such as those by the Bank of England, and that their quality should be judged by the payoffs they enable. However, formal evaluation requires linking forecasts to a specific loss function that reflects the institution’s objectives.

The authors note that while decision-theoretic approaches exist, it remains unclear how to quantify the forecast’s contribution to the payoff when a specific central bank loss function must be used, highlighting a gap between forecasting practice and decision evaluation.