Research Discussion Papers, Bank of Finland
How to Evaluate the Forecasting Performance of a Macroeconomic Model
() and Matti Viren
Abstract: This paper provides an answer to the question of how to
improve the forecasting performance of a macro model to better account for
economic developments and how to evaluate the forecasting uncertainty. The
main tool in this assessment is stochastic simulation. Stochastic
simulations in this paper involve both endogenous and exogenous variables.
These simulations also allow us to assess the linearity of the model.
Alternative dynamic simulations may, in turn, give some idea of the
stability of the model. Finally, the forecasts may be improved by comparing
the outcomes from the macro model and from a leading indicators' model.
This kind of exercise is particularly useful in assessing the developments
in the short run, in which case the macro models typically perform rather
Keywords: forecasting; macro models; simulation; (follow links to similar papers)
JEL-Codes: E37; (follow links to similar papers)
29 pages, April 14, 1998
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