Are the Bank of Korea's Inflation Forecasts Biased Toward the Target?

Created in December 01, 2025

2025   ·   forecasting   monetary-policy   bias   Bank-of-Korea

Joint work with Seojeong Lee — Journal of Forecasting, December 2025. [DOI]

Motivation

The Bank of Korea (BoK) regularly publishes the Economic Outlook, providing forecasts for key macroeconomic variables including GDP growth, inflation, and unemployment rates. Central bank forecast transparency matters: if a central bank’s inflation forecasts are systematically biased, it can mislead the public and undermine the credibility of forward guidance.

A natural concern is whether the BoK’s inflation forecasts tend to be pulled toward its official inflation target — a phenomenon sometimes called target bias. If forecasters strategically align their projections with the target regardless of underlying economic conditions, the forecasts lose their informational value.

What We Do

We extend the Holden and Peel (1990) unbiasedness test to incorporate state-dependency. Specifically, we define the state of the economy based on whether realized inflation falls below the target at the time the forecast is made. This allows us to test whether forecast bias differs depending on the inflation regime.

Main Findings

Our analysis reveals that the BoK’s inflation forecasts are biased under the state-dependent framework. In particular, [describe the direction and magnitude of bias here].

The figure below illustrates [brief description of what the figure shows].

Bias Correction

We examine a range of bias correction strategies, including:

  • AR(1)-based correction and its state-dependent variant
  • Mean error correction and its state-dependent variant

These strategies generally improve forecast accuracy. Among them, the AR(1)-based correction exhibits relatively stable performance, consistently reducing the root mean square error (RMSE).