The Economic Outlook forecasts and accompanying analyses are conditional on a consistent set of assumptions about policies and underlying economic and financial conditions, including fiscal and monetary policy settings, exchange rates, commodity prices and international financial markets. The specific assumptions used are always stated in the Box “Policy and other assumptions underlying the projections” in the “General Assessment of the Macroeconomic Situation” chapter of the relevant edition of the Economic Outlook. Assessments of the economic implications of alternative assumptions are also routinely explored.
Macroeconomic policies are typically assumed to be "unchanged" over the projection period and on the basis of current fiscal and monetary policies. This does not mean that the OECD Secretariat necessarily assumes that governments will – or should - achieve their stated objectives, or that policies themselves may not adapt to differing economic circumstances. Rather the OECD forecasts represent the likely outcomes for growth, inflation, employment and other key economic variables for given unchanged policy settings.
Fiscal policy assumptions are based as closely as possible on legislated tax and spending provisions. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. Otherwise, in countries with impaired public finances, a tightening of the underlying primary balance by a certain percentage of GDP is built into the projections. For detail see the Box “Policy and other assumptions underlying the projections” in the “General Assessment of the Macroeconomic Situation” chapter of the relevant Economic Outlook. Where there is insufficient information to determine the allocation of budget cuts, the presumption is that they apply equally to the spending and revenue side, and are spread proportionally across components. These conventions allow for needed consolidation in countries where plans have not been announced at a sufficiently detailed level to be incorporated in the projections.
Domestic monetary policies
The monetary policy assumptions take into account a range of monetary and financial indicators, including policy announcements with respect to the choice of monetary targets, associated target ranges and policy instruments, by the national authorities. Policy controlled short-term interest rates are typically assumed to be set in line with the stated objectives of the relevant monetary authorities, conditional upon the OECD projections of activity and inflation, which may differ from those of the monetary authorities. The resulting interest rate profiles should therefore not to be interpreted as a projection of central bank intentions or market expectations thereof.
The resulting paths of short-term interest rates are assumed to feed into long term interest rates in a manner consistent with the usual expectations hypothesis of the term structure of interest rates, by which long-term interest rates are an average of future short-term rates. In addition, account is taken of the term premia, the extra amount of yield that investors in longer-term bonds in each economy require as compensation for the risk of capital losses and/or lack of liquidity.
For countries with government gross debt exceeding 75 percent of GDP, the term premium is assumed to rise with the level of debt. For further details see the Box “Policy and other assumptions underlying the projections” in the “General Assessment of the Macroeconomic Situation” chapter of the relevant Economic Outlook.
Nominal exchange rates against the US dollar are set by technical assumption to remain constant over the projection period, at levels prevailing on a pre-specified cut-off date. The corresponding profiles of nominal and effective exchange rates beyond the current year are therefore typically constant for all countries and regions.
There are two reasons for using such a simple technical assumption. Firstly, specific exchange rate forecasts continue to be politically and market sensitive for many countries and areas. At the same time, short-term exchange rate movements are typically quite difficult to predict and, in practice, a naive random-walk model – one assuming nominal rates to remain broadly at current levels - is often found to be no less accurate than predictions based on more complex econometric or statistical relationships.
Nonetheless, to the extent that underlying economic conditions or associated risks may at times suggest possible systematic upward or downward pressures on major currencies, the wider economic consequences of such movements are routinely explored as alternative scenarios, based upon macro-econometric simulations.
Oil and non-oil commodity prices
Given the volatility of oil prices, the OECD has adopted, as a working hypothesis, the assumption that the price of Brent crude remains constant over the relevant projection period, at a level equaling the average price over a specific period prior to the cut-off date for information used in the projections. Non-oil commodity prices are similarly assumed to stabilise around current levels, unless there is clear evidence to the contrary. Alternative commodity price assumptions, particularly for oil prices, are a regular subject in model-based risk assessments.
Last updated: December 2011
Sources & Methods of the OECD Economic Outlook