Is Forecasting with Large Models Informative? Assessing the Role of Judgement in Macroeconomic Forecasts

63 Pages Posted: 18 Nov 2008

See all articles by Ricardo Mestre

Ricardo Mestre

European Central Bank (ECB)

Peter McAdam

European Central Bank (ECB)

Date Written: October 10, 2008

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 judgment. Conclusions reached are that simple mechanical residual adjustments have a significant impact of forecasting accuracy irrespective of the model in use, ostensibly 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 thus of general interest.

Keywords: Macro-model, Forecast Projections, Out-of-Sample, In-Sample, Forecast Accuracy, Structural Break

JEL Classification: C52, E30, E32, E37

Suggested Citation

Mestre, Ricardo and McAdam, Peter, Is Forecasting with Large Models Informative? Assessing the Role of Judgement in Macroeconomic Forecasts (October 10, 2008). ECB Working Paper No. 950, Available at SSRN: https://ssrn.com/abstract=1282042

Ricardo Mestre (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Peter McAdam

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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