Practical Use of Macroeconomic Models at Central Banks

Macroeconomic models are effective tools for central banks in economic projection, including risk assessment. In recent years, a multiple-model approach called the "Suite of Models" has become popular with central banks. This approach advocates the use of multiple models for several purposes, including checks of the robustness of projections. This idea has encouraged major central banks to use different types of models. These include hybrid-type models, which pursue short-run empirical coherence and long-run theoretical consistency, and Dynamic Stochastic General Equilibrium (DSGE) models, which place greater emphasis on theory. At the Bank of Japan, a new hybrid-type model named Q-JEM (Quarterly-Japanese Economic Model) has been recently added to the Bank's suite of models. A suite of models is useful for forecasting and for policy analysis. The use of models, however, requires sufficient understanding on the properties and limitations of each model.