What do inflation forecasts reveal after two decades of inflation targeting in Mexico?

Abstract

Using forecasts extracted from public official documents, we draw the following lessons. First, Banco de México has consistently underpredicted headline inflation since 2007. Second, this pattern extends to forecasts of core inflation, a measure that excludes volatile prices and is purportedly within the reach of the central bank. Third, statistical properties of projections, such as balance and accuracy, vary depending on who is serving as governor of Banco de México, especially for core inflation forecasts. Fourth, these properties have deteriorated sharply over the past 8 years; headline and core inflation forecasts are more skewed towards underprediction and less accurate than in earlier years. Finally, the deterioration in the forecast balance seems rooted in an asymmetric loss function that penalizes overpredictions more than underpredictions, rather than in supply and external shocks we control that might otherwise have rendered these forecasts irrational.