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Forecasting With Regression Model

This document discusses different types of forecasts: 1. Conditional vs unconditional forecasts - conditional forecasts predict the effect of changing one variable (e.g. interest rates) on another (e.g. output), while unconditional forecasts predict the value of a variable without changing any others. 2. Point vs interval forecasts - point forecasts predict a single value, while interval forecasts predict a range of probable values. 3. The document argues that conditional forecasts are easier than unconditional forecasts because they only require accurately predicting the change in one variable rather than many variables simultaneously.

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Gitanjali gitanjali
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78 views

Forecasting With Regression Model

This document discusses different types of forecasts: 1. Conditional vs unconditional forecasts - conditional forecasts predict the effect of changing one variable (e.g. interest rates) on another (e.g. output), while unconditional forecasts predict the value of a variable without changing any others. 2. Point vs interval forecasts - point forecasts predict a single value, while interval forecasts predict a range of probable values. 3. The document argues that conditional forecasts are easier than unconditional forecasts because they only require accurately predicting the change in one variable rather than many variables simultaneously.

Uploaded by

Gitanjali gitanjali
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Forecasting With Regression

Model
• A forecast can be defined generally as a statement about an unknown and uncertain
event— most often, but not necessarily, a future event. Such a statement may vary
greatly in form and content: it can be qualitative or quantitative, conditional or
unconditional, explicit or silent on the probabilities involved. A reasonable
requirement, however, is that the forecast should be verifiable, at least in principle;
trivial predictions that are so broad or vague that they could never be found incorrect
merit no consideration, and the same applies to predictions that are rendered
meaningless by relying on entirely improbable assumptions or conditions. As for the
“event” that is being predicted, it too is to be interpreted very broadly. Thus the
forecast may refer to one particular or several interrelated situations (single versus
multiple predictions). It may identify a single value or a range of values likely to be
assumed by a certain variable (point versus interval predictions). Various combinations
of these categories are possible, and some are interesting; for example, an
unconditional interval prediction can be viewed as a set of conditional point
predictions (that is, the forecaster estimates the range of probable outcomes by
setting limits to the variation in the underlying conditions).
Conditional V/s Unconditional forecast
• The level of output depends on a huge number of things: demand
in the rest of the world, fiscal policy, oil prices etc. It also depends
on interest rates. We can distinguish between a conditional and an
unconditional forecast.
• An unconditional forecast says what output will be at some date.
• A conditional forecast says what will happen to output if interest
rates, and only interest rates, change.
• An unconditional forecast is clearly much more difficult, because
you need to get a whole host of things right.
• A conditional forecast is easier to get right.
• Conditional forecasts and, in particular, scenarios are
projections of a set of variables of interest on future paths of
some other variables. This is in contrast to unconditional
forecasts, where no knowledge of the future path of any
variables is assumed. The prior knowledge, albeit imperfect, of
the future evolution of some economic variables may carry
information for the outlook of other variables. For example,
future fiscal packages would affect the future evolution of
economic activity and, thus, might provide important off-
model information. Moreover, it may be of interest to assess
the impact of specific future events on a set of variables, i.e. to
conduct scenario analysis
• Paul Krugman is rightly fond of saying that Keynesian economists got a
number of things right following the recession: additional debt did not lead
to higher interest rates, Quantitative Easing did not lead to hyperinflation,
and austerity did reduce output. These are all conditional forecasts. If X
changes, how will Y change? An unconditional forecast says what Y will be,
which depends on forecasts of all the X variables that can influence Y.

• We can immediately see why the failure of unconditional forecasts tells us


very little about how good a model is at conditional forecasting. A
macroeconomic model may be reasonably good at saying how a change in
interest rates will influence output, but it can still be pretty poor at
predicting what output growth will be next year because it is bad at
predicting oil prices, technological progress or whatever.

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