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Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks

Author

Listed:
  • Adolfson, Malin

    (Research Department, Central Bank of Sweden)

  • Andersson, Michael K.

    (Monetary Policy Department, Central Bank of Sweden)

  • Lindé, Jesper

    (Research Department, Central Bank of Sweden)

  • Villani, Mattias

    (Research Department, Central Bank of Sweden)

  • Vredin, Anders

    (Monetary Policy Department, Central Bank of Sweden)

Abstract

There are many indications that formal methods are not used to their full potential by central banks today. In this paper we demonstrate how BVAR and DSGE models can be used to shed light on questions that policy makers deal with in practice using data from Sweden. We compare the forecast performance of BVAR and DSGE models with the Riksbank's official, more subjective forecasts, both in terms of the actual forecasts and root mean square errors. We also discuss how to combine model- and judgment based forecasts, and show that the combined forecast performs well out-of-sample. In addition, we show the advantages of structural analysis and use the models for interpreting the recent development of the inflation rate using historical decompositions. Lastly, we discuss the monetary transmission mechanism in the formal models, using impulse response functions and conditional forecasts.

Suggested Citation

  • Adolfson, Malin & Andersson, Michael K. & Lindé, Jesper & Villani, Mattias & Vredin, Anders, 2005. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," Working Paper Series 188, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
    • Handle: RePEc:hhs:rbnkwp:0188
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bayesian inference; Combined forecasts; DSGE models; Forecasting; Monetary policy; Subjective forecasting; Vector autoregressions;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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