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

  • 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)

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.

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File URL: http://www.riksbank.se/upload/WorkingPapers/WP_188Revised.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 188.

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Length: 36 pages
Date of creation: 01 Sep 2005
Date of revision: 01 Jun 2006
Handle: RePEc:hhs:rbnkwp:0188
Contact details of provider: Postal:
Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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