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MODEL-BASED VS. PROFESSIONAL FORECASTS: IMPLICATIONS FOR MODELS WITH NOMINAL RIGIDITIES

Published online by Cambridge University Press:  17 February 2016

João Valle e Azevedo  and
João Tovar Jalles
João Valle e Azevedo*
Affiliation:
Banco de Portugal and Nova School of Business and Economics
João Tovar Jalles
Affiliation:
OECD
*
Address correspondence to: João Valle e Azevedo, Banco de Portugal, Research Department, Av. Almirante Reis, 71-6th floor, 1150-012 Lisboa, Portugal; e-mail: [email protected]
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Abstract

We compare model forecast error statistics with forecast error statistics of professional forecasts. We look at a standard sticky-prices–wages model, concluding that it delivers too strong a theoretical forecastability of the variables under scrutiny, at odds with the data (professional forecasts). We argue that the lack of compatibility between the model and professional forecasts results from trying to fit inflation (which is probably nonstationary) to a model that assumes inflation is stationary. A modified version of the model, one with a varying inflation target, delivers a better fit in terms of forecastability.

Keywords

Survey of Professional ForecastersDSGE ModelsNominal Rigidities
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 130 - 159
Copyright
Copyright © Cambridge University Press 2016 

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