Practice and Prospects of Medium-term Economic Forecasting

Government agencies and other national and international institutions are asked to perform forecasts over the medium term. In particular, the EU Stability and Growth Pact contains the obligation to formulate stability programmes over four years, covering a general economic outlook as well as the pro...

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Bibliographic Details
Published in:Jahrbücher für Nationalökonomie und Statistik 2011-02, Vol.231 (1), p.153-171
Main Authors: Hofer, Helmut, Schmidt, Torsten, Weyerstrass, Klaus
Format: Article
Language:English
Subjects:
aggregate production function
Austria
Econometric models
Economic fluctuations
Economic forecasting
Economic forecasting models
Economic forecasts
Economic growth models
Economic models
Economic theory
Forecasting models
Forecasting techniques
Gross domestic product
Growth models
macroeconomic forecasts
Macroeconomic modeling
Macroeconomics
Time series forecasting
Time series models
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Summary:Government agencies and other national and international institutions are asked to perform forecasts over the medium term. In particular, the EU Stability and Growth Pact contains the obligation to formulate stability programmes over four years, covering a general economic outlook as well as the projected development of public finances. However, the current practice of performing medium-term economic projections is unsatisfactory from a methodological point of view as the applied methodology has been developed for short-run forecasting and it is questionable whether these methods are useful for the medium term. In particular, currently medium-term projections are mostly based on the neoclassical Solow growth model with an aggregate production function with labour, capital and exogenous technological progress. It might be argued, however, that for medium-run projections endogenous growth models might be better suited. In this paper we give an overview of currently used methods for medium-term macroeconomic projections. Then we analyse the performance of mediumterm forecasts for Austria to illustrate the strengths and weaknesses of the typical approach. In particular, the five-year projections of real GDP growth, inflation and the unemployment rate are investigated. Finally, we describe some approaches to improve medium-run projections.
ISSN:0021-4027
2366-049X
DOI:10.1515/jbnst-2011-0110