Forecasts with Quarterly Macroeconometric Models, Equation Adjustments, and Benchmark Predictions: The U.S. Experience

Abstract

E CONOMETRIC forecasts that are conditional on particular values for United States government policy variables are used as an aid in the formulation of macroeconomic policy, while unconditional (ex ante) forecasts are used as inputs for other decisions. Both conditional and unconditional forecasts are made with models that typically include adjustments to the constant terms in the stochastic equations. However, the extent of such equation adjustments may vary greatly. Some econometricians use only mechanical adjustments to account for the cyclical patterns in the structural equation residuals. Others use equation adjustments to introduce exogenous factors that are not included in the specification of the Finally, some forecasters allow complete interaction between the model and their judgment. The latter view is expressed forcefully by P. J. Verdoorn of the Dutch Centraal Planbureau: from being a mere mathematical forecasting tool, an econometric model, therefore, serves too as a vehicle for the consistent allocation and processing of such available independent information as was not originally contained in the model. (1970, p. 1).