7 NZTM in the forecasting process
7.1 The role of NZTM in the forecasting process
In a typical year the Treasury produces two sets of forecasts, the Budget Economic and Fiscal Update and the Half Year Economic and Fiscal Update. As discussed in the introduction, NZTM has played an increasing role in the formation of these forecasts. Mawson (2005) notes the advantage of using a model to forecast is:
- To require forecasters to be explicit about how different variables relate to each other
- To ensure internal consistency, meaning changes to the forecast path are flowed through consistently, and
- To force constraints and long-run anchors to be adhered to.
The interaction of the model with the rest of forecasting process can be stylised using the following diagram (see Figure 13). Sections 7.2-7.5 discuss each of the different interactions between the model and the forecast process.
7.2 Short-run forecasts
The Treasury uses a set of indicator models to forecast the short-term (typically the first, second and sometimes third quarters after the latest release of GDP). The indicator models are designed to use available macroeconomic data (typically from Statistics New Zealand but also from consumer and business confidence surveys and other sources) as well as the sector analysts’ judgement to formulate short-term forecasts. At the Treasury, these indicator models are typically single equation models (for example, using building consents and house sales to predict residential investment). Recently the Treasury has also employed factor models in the style of Matheson (2006) to forecast GDP one to four quarters ahead. In addition, the judgement component is informed by information obtained by visiting businesses or other information available. These forecasts are then put into NZTM as if they are historical data
- Figure 13: NZTM and the forecast process
(1) For example from Statistics New Zealand, the Reserve Bank, Datastream and consumer and business confidence surveys.
(2) These take aggregate model output and disaggregate it as a consistency check on model output. For example, estimating a household saving rate by constructing a Household Income Outlay Account.
(3) This is a panel of senior Treasury staff that review the forecasts.
(4) This is a panel of external experts which include academic scholars and ex-public and private sector forecasters.
