Forecasting and Policy Analysis with Econometric Models

This chapter shows that the problems of constructing a multi-equation econometric model are very much more difficult than the problems inherent in estimating individual relationships. In the 1950&s;s, quantitative inquiry concerning the determinants of the balance of payments turned to multi-equation models. This shift in emphasis required, of course, the concurrent evolution of large-scale electronic computing facilities. The chapter discusses that the difference between informative and decision forecasts is meant to emphasize that the form a forecast assumes will depend on the forecaster&s;s role in the decision process. The development of econometric models quite naturally began with relatively small models with relatively few variables and equations. The chapter considers each market&s;s impact on the balance of payments to try to make some judgment as to whether that market may be excluded from the model or aggregated with another market. An econometric model was used to forecast the level of the components of the US current account in 1968.