Faculty of Economics and Business Administration Publications Database

Forecasting and Policy Making

Wolters, Maik H.

Policymakers use forecasts to project the consequences of particular policy decisions for certain policy targets. This chapter investigates the use of economic forecasting in policy making by discussing practical examples, providing new empirical evidence and computing forecasts using different macroeconomic models. First, a theoretical framework is presented to differentiate the role of forecasts in simple feedback rules, optimal control policies, and forecast targeting. Then, we review institutional details of the forecasting process at fiscal authorities and central banks. We provide empirical evidence that central bank policy rate decisions in the United States and the Euro area are well described by interest rate rules responding to forecasts of inflation and economic activity rather than recent outcomes. Next, we provide a detailed exposition of methods for producing forecasts. We review forecasting models and provide practical applications. In particular, we illustrate how to use economic structure in interpreting forecasts and how to implement different conditioning assumptions regarding certain planned policy initiatives. Finally, we evaluate the accuracy of central bank and expert forecasts and investigate the interaction between forecasting and policy making by evaluating the performance and robustness of forecast-based policy rules under model uncertainty.

Keywords: Forecasting; Monetary Policy; Fiscal Policy; DSGE Models; Conditional Forecasts; Policy Rules; Expectations; Business Cycles; Robust Policy
Year: 2013
Link External Source: Online Version
Book Title: Handbook of Economic Forecasting
ISBN: 978-0444627322
Editor: Graham, Elliott / Timmermann, Allan
Publisher: North Holland
Pages: 239