Using bank supervisory data to improve macroeconomic forecasts

Locating the function of bank supervision in the central bank has been a contentious issue, both domestically and internationally. Most discussions of the role of bank supervision in central banking have focused on crisis management and the responsibilities of the central bank as a lender of last resort. However, recent research by the authors has shown that confidential supervisory information garnered through bank examinations potentially can improve the forecasts of key macroeconomic variables and thus the conduct of monetary policy. Forecasting macroeconomic variables is essential to the conduct of monetary policy, since the long lags in the effect of monetary policy ensure that changes in monetary policy today alter the economy only in the future. This article explores further the robustness of the results reported earlier. It examines the pattern of the forecast errors of the individual private forecasters studied, and confirms the earlier results. Thus, the article concludes that an important reason for central banks to have access to confidential supervisory information, and possibly to participate in its collection, is that such information can improve macroeconomic forecasts and in this way improve monetary policy decision-making.