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Evaluation of the Central Bank of Brazil Structural Model's Inflation Forecasts in an Inflation Targeting Framework

The article evaluates the performance of the small-scale macro model (SSMM) of the Central Bank of Brazil as a tool for supporting the monetary policy decision process. The forecasts of IPCA inflation for 1 to 3 quarters ahead were compared to market forecasts as well as to the projections of a benchmark model. Market projections made by private consulting institutions and banks turned out to be quite efficient for up to 2 quarters ahead, with almost no bias and low dispersion, suggesting the acceptance of the market efficiency hypothesis. The SSMM performed quite well for whole forecast horizon, presenting almost no forecast bias and low dispersion. Compared to other projections the SSMM forecasts yield, in average, the lowest dispersion and greater stability. The article concludes that the SSMM possess the basic features to support the monetary policy decision process.