Norges Bank improves forecasting methods for external shocks
A paper published by the Norges Bank on 27 April shows that the theory of conditional forecasts can be extended to dynamic stochastic general equilibrium (DSGE) models.
Despite the usefulness and relative accuracy of new-generation DSGE models, forecasts can be skewed by misspecified conditional information, the author finds. In the event of huge and unexpected shocks, models that lack the flexibility to adapt are very likely to deliver poor forecasts.
The technique presented in the paper allows
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