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Practice and Prospects of Medium-term Economic Forecasting

Helmut Hofer, Torsten Schmidt and Klaus Weyerstrass ()

No 177, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: 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 medium-term 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.

Keywords: Econometric models; macroeconomic forecasts; aggregate production function; Austria (search for similar items in EconPapers)
JEL-codes: C53 E32 E37 E66 (search for similar items in EconPapers)
Date: 2010
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Journal Article: Practice and Prospects of Medium-term Economic Forecasting (2011) Downloads
Working Paper: Practice and prospects of medium-term economic forecasting (2010) Downloads
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