Forecast Error Bounds By Stochastic Simulation

What can the National Institute model tell us about the accuracy of forecasting inflation and growth? We make ‘point’ forecasts over the short to medium term, and assess the accuracy of those forecasts by examining past forecast errors (see Poulizac, Weale and Young, 1996). But the model itself can be used for the same purpose and can inform us better than historical exercises if a new policy regime has been adopted which is a major departure from past experience. In that case, the behaviour of the economy would be expected to be considerably different and so using a model which captures the structural effects of the changes may give a more accurate view of the likely behaviour of policy targets, policy instruments and other variables.