Dr. Félicien USENGUMUKIZA

Senior Lecturer at National University of Rwanda

UNITED NATIONSECONOMIC COMMISSION FOR AFRICASub regional Office for Eastern Africa (SRO – EA)

Kigali, March 13TH 2010

Overview of Macroeconomic models and Forecasting

Objective of the study

Methodology

Justification of Modelling and Forecasting Methods in EAC Central

Banks

Challenges and Gaps related to Modelling and Forecasting use in

EAC Central Banks

Conclusion

Recommendations

OVERVIEW OF MACROECONOMIC MODELS AND FORECASTING

Macroeconomic model is a basic tool of analysis used to describe, to

explain and to understand macroeconomic phenomenon.

A model serves as like a laboratory of

experimentation or for testing hypothesis

Making assumptions regarding behaviour of

macro variables,

Specifying equations expressing the

relationship between the selected macroeconomic

variables

Specifying and defining variables used in the

model,

Specifying criteria for drawing conclusions

Expressing economic identities if required

Economic forecasts predict the course of the aggregate economy and

concentrate on variables such as GDP analysis, interest rates, the rate of

inflation, and the rate of unemployment. Forecasts of private consumption

and investment, government expenditures, and net exports help government

policymakers responsible for fiscal policy.

QUANTITATIVE METHODS

QUALITATIVEMETHODS

FORECASTING METHODS

CAUSAL FORECASTING

METHODS

TIME SERIESMETHODS

JUDGEMENTALMETHODS

use historical data as the basis

of estimating future outcomes

use the assumption that it is possible to

identify the underlying factors

that might influence the variable that is

being forecast

incorporate intuitive judgements, opinions

and subjective probability estimates

MODELLING & FORECASTING METHODS IN EAC CENTRAL BANKS

To undertake a stocktaking of the competency gaps in Economic Modelling

and Forecasting in the five central banks;

To define the areas where the overall level of the region stands behind;

To define needs of a training capacity building program and the recipient

candidates;

To formulate recommendations on training modules and general content.

The field work has been identified as the best approach. It is in this context

that the tour in the five EAC central banks was carried out within two

weeks. It has been identified that Research Department in each central

bank would be the best source of information related to the needs in terms

of training in Modelling and Forecasting Program.

To develop adequate skilled capacity in analytical capability of EAC Central Banks to

effectively manage the monetary policies and monitor the performance of the Economies

in the Region,

To enhance the capacity in management of reserves money and liquidity forecasting,

To understand how financial markets work and impact on monetary policy;

To undertake surveys on inflation expectations;

To understand interaction between monetary policy and real sector, and liquidity

forecasting ,

To eliminate liquidity phobia associated with commercial banks borrowing from central

bank.

Bank of Tanzania

National Bank of Rwanda

(BNR)

Bank of Uganda

Central Bank of Kenya

(CBK)

Banque de la République du Burundi (BRB)

Research Department

Directorate of Research

Large Macro econometric Modelling

Section Research Department

Senior Directorate (Monetary Policy

and Research, Financial Stability)

Modelling & Forecasting

Division

Monetary & Financial Market

Department

Directorate of Research

STUDY ON MODELLING AND FORECASTING IS A TASK OF RESEARCH DEPARTMENT IN EAC CENTRAL BANKS

Some Central banks are not using the econometric approach in modelling and

forecasting analysis

All EAC central Banks witness a gap in terms of high qualified staff equipped with

econometric background

Use of adequate software related to modelling and forecasting is almost inexistent

Lack of harmonisation in terms of forecasting techniques. This leads to the

diversification in terms of interpreting the results from respective central banks

• Scarcity of sound forecasting frameworks weakens budgeting and planning processes

in the continent;

• EAC Central Banks remain far behind in building full-fledged macroeconomic models

and in providing accelerated training for qualified modellers and forecasters ;

• Macroeconomic forecasting in EAC Central Banks has been highly dependent on

models developed in others central banks in the world, which were not true

representation of local realities;

Modelling and Forecasting Program is designed to provide anyone who needs to make

financial decisions,

The reality found in EAC central Banks confirms that the training in Modelling and

Forecasting is for great necessity,

The heads of research department in respective EAC Central banks are welcoming the

initiative proposed by UNECA of providing such kind of training,

As the EAC is deepening and widening its regional integration, the harmonisation of

macroeconomic and financial analysis will facilitate to eliminate gaps observed in

interpretation of national and regional economy.

EAC central Banks needs training in modelling and forecasting in order to facilitate the

harmonisation of macro economic and financial analysis with the community.

due to existing gaps between different central banks, it would be necessary to organise

internal training related to specific needs and gaps of each individual central bank.

The share of experience among staff of central banks would accelerate the harmonisation

of financial analysis

Due to the project establishing the EAC central bank, some activities would be executed

jointly with the five central banks.

The EAC needs to establish its own model related to its reality rather than continuing

using models applied in advanced economies.

N˚ Country Institution Name of contacted Person

Position Address Phone number E-mail

1. RwandaNational Bank of Rwanda (BNR)

Dr. Kigabo Rusuhuzwa Thomas

Chief EconomistP.O Box 531

Kigali -Rwanda+250 788303633 thkigabo@yahoo.fr

2. BurundiBanque de la

République du Burundi (BRB)

Mr. Sota BonaventureDirecteur Responsable du service des Etudes

P.O Box 705 Bujumbura -

Burundi

+257 79910367 sotabon@yahoo.fr

Mr. Audace NiyonzimaDeputy Director Monetary & Financial Market Department

+257 79970126 aniyonzima@brb-bi.net

Mr. Joseph BahiziHead of Monetary & Financial Market Department

+257 77733230 jbahizi@brb-bi.net

3. Uganda Bank of Uganda

Dr. Adam MugumeAssistant Director Head, Modelling & Forecasting Division P.O Box 7120

Kampala - Uganda

+256 772416058 amugume@bou.or.ug

Mr. Francis Leni AnguyoHead, Large Macroeconometric Modelling Section Research Department

+256 774224565 fanguyo@bou.or.ug

4. Tanzania Bank of TanzaniaDr. Kamili Alphonce

KombeDeputy Director, Research

P.O Box 2939 Dar es Salaam

Tanzaniakakombe@hq.bot-tz.org

5. KenyaCentral Bank of Kenya (CBK)

Mr. Charles G. Koori Director of Research DepartmentP.O Box 60000-00200 Nairobi -

Kenya

+254 722235583 kooricg@centralbank.go.ke

Mr. Lukas Njoroge Research Department +254 720459004 NjorogeLK@centralbank.go.ke