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Is forecasting with large models informative? Assessing the role of judgement in macroeconomic forecasts

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  • Ricardo Mestre
  • Peter McAdam

Abstract

We evaluate residual projection strategies in the context of a large-scale macro model of the euro area and smaller benchmark time‐series models. The exercises attempt to measure the accuracy of model‐based forecasts simulated both out‐of‐sample and in‐sample. Both exercises incorporate alternative residual‐projection methods, to assess the importance of unaccounted‐for breaks in forecast accuracy and off‐model judgement. Conclusions reached are that simple mechanical residual adjustments have a significant impact on forecasting accuracy irrespective of the model in use, likely due to the presence of breaks in trends in the data. The testing procedure and conclusions are applicable to a wide class of models and of general interest. Copyright (C) 2010 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 30 (2011)
Issue (Month): 3 (April)
Pages: 303-324

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Handle: RePEc:jof:jforec:v:30:y:2011:i:3:p:303-324

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Keywords: macro model ; forecast projections ; out‐of‐sample ; in‐sample ; forecast accuracy ; structural break ; Economic Monetary Union ;

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  8. Adalid, Ramon & Coenen, Gunter & McAdam, Peter & Siviero, Stefano, 2005. "The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area," MPRA Paper 821, University Library of Munich, Germany.
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Cited by:
  1. Christian Ragacs & Martin Schneider, 2009. "Why did we fail to predict GDP during the last cycle? A breakdown of forecast errors for Austria," Working Papers 151, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Hjelm, Göran & Jönsson, Kristian, 2010. "In Search of a Method for Measuring the Output Gap of the Swedish Economy," Working Paper, National Institute of Economic Research 115, National Institute of Economic Research.
  3. Kevin Clinton & Marianne Johnson & Jaromir Benes & Douglas Laxton & Troy Matheson, 2010. "Structural Models in Real Time," IMF Working Papers 10/56, International Monetary Fund.
  4. repec:onb:oenbwp:y::i:151:b:1 is not listed on IDEAS
  5. Henzel, Steffen R. & Mayr, Johannes, 2013. "The mechanics of VAR forecast pooling—A DSGE model based Monte Carlo study," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 1-24.

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