The core and related models

There are core models in both the RBA and the Treasury. The current RBA model is described in Beechey et al. (2000) and the Treasury's has the acronym TRYM (see www.treasury.gov.au for documentation of this model). The RBA model is relatively small, with five stochastic equations and about 19 exogenous variables. It does not feature forward-looking behavior. Perhaps the best way to describe it would be as a slimmed down version of the MM model used at the Bank of England, even though it was not...

Should one develop a model

At one level, the question here is simply semantic. One U.S. policy-maker, Laurence Meyer (1999), argues strongly for the utility of models in the policy process. Mostly what is at issue is the type of model. Thus, the question we are posing here has to be one concerning whether a forecast might be produced without any economic model, even a very informal one. For the likely readership of this chapter, the question may sound somewhat odd, but there are two reasons for raising it. First, if the...

How can one measure the success or failure of forecasts

A forecast might reasonably be judged successful if it was close to the outcome, but that judgment depends on how close is measured. Reconsider our example of guessing the distance to the moon it is apparent that accuracy and precision are two dimensions along which forecasts may be judged. To the layman, a very precise forecast that is highly inaccurate might be thought undesirable, as might an accurate but very imprecise forecast and experts concur - the gold standard is an accurate and...

The Reserve Bank of Australia The process

Monetary policy in Australia is set by the Reserve Bank of Australia (RBA) Board. This Board consists of nine members, seven of whom are external to the Bank. No regular set of published forecasts is provided but they can sometimes be gleaned, at least on a qualitative dimension, from studying the Semi-Annual Statement on Monetary Policy, the quarterly reports on The Economy and Financial Markets and speeches of RBA officials.12 One peculiarity of monetary policy in Australia is that the...

What type of forecasting system is desirable

Often forecasting is performed in different sections of a policy-making institution, each with responsibilities for specific parts of the forecast horizon. In particular, it is very common to have two sections. One section concentrates upon modeling of the whole system with a core model, adopting an horizon that is longer than six months, while the other focuses upon the initial six months. This latter group generally employs either an indicator or spreadsheet model, but also uses a good deal...

BEA Auto Unit Sales

We now provide an example of univariate modeling and forecasting with structural time-series models with respect to the monthly domestic auto unit sales made available by the U.S. Bureau of Economic Analysis (BEA) at the URL http www.bea.doc.gov bea pn ndn0207.exe. The series covers the sample period 1967.1-1998.6, and is an extension of that studied in Findley et al. (1998), to compare a subjective pre-adjustment made by an expert analyst and an objective one, based upon five user-defined...

Conclusions and Extensions

In this chapter, the use of VARMA processes for forecasting systems of variables has been considered. In this procedure, the usual steps of model specification, estimation, and diagnostic checking have to be done first. Once a well-specified and efficiently estimated model has been established, it can be used for forecasting in a straightforward manner. Procedures are presented that may be used in the different steps of the analysis. It is assumed that all variables are at most I 1 , so that...

Density forecasts from options prices

A recent development is the derivation of density forecasts from the information about market participants' perceptions of the underlying asset price distribution contained in option market data. Soderlind and Svensson 1997 describe how methods of extracting information about market expectations from asset prices for monetary policy purposes have developed from the estimation of expected means of future interest rates and exchange rates from forward rates to estimation of their complete...