News versus Surprise in Structural Forecasting Models: Central Bankers' Practical Perspective

Karel Musil, Stanislav Tvrz and Jan Vlcek

Research and Policy Notes from Czech National Bank, Research and Statistics Department

Abstract: The paper deals with the treatment of shocks in central banks' forecasts. Within the rational expectations (RE) concept, which is widely used in structural macroeconomic models, the paper highlights the differences between news and surprise shocks and argues that most shocks in central bank forecasts should be treated as news. The paper also points out some drawbacks of news shocks under the assumption of full information from the practical point of view of forecasting and policy decision-making at central banks. As a potential solution, the paper refers to the LIRE concept as introduced in Brazdik et al. (2020). The paper discusses the properties of the LIRE concept and finds it versatile and useful in dealing with news shocks without abandoning the RE framework. The paper concludes that LIRE can be effectively used for practical structural macroeconomic modelling.

Keywords: Anticipated shocks; conditional forecast; DSGE models; rational expectations (search for similar items in EconPapers)
JEL-codes: D58 D84 E37 E52 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:rpnrpn:2021/02

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