7.4 Judgement
A final factor that can affect the dynamic path is judgement. When used as part of Treasury's forecasting process, judgement has generally been applied when there are situations that the model is not particularly well equipped to handle occur. Recent examples when we have imposed judgement include the impact of the Emissions Trading Scheme on inflation and the impacts on the international investment position from higher borrowing costs due to the financial market turmoil that arose from the US sub-prime mortgage crisis. Judgement may also be required to deal with data anomalies.
Another situation where judgement is used is to smooth the adjustment between short-run forecasts (see Section 7.2) and the model's forecast of the dynamic path. Referring to the stylised diagram of the model below (Figure 15), it is most likely that the short-run forecast value provided by the Treasury forecasting team for these quarters will differ from the model's dynamic path value; we denote this difference as “residual” (xdt) in Figure 15). We need to make some assessment of the adjustment back to the model's dynamic path, xdt. If we allow adjustment straight back to the model's dynamic value, then we are implicitly assuming that previous deviation was due to factors specific to the previous quarter. If, on the other hand, the sector analyst's forecast has some information value (ie, reflects something the model is not formulated to capture) and thus needs to be taken into account in the model's forecast period, we will give the “residual” some time to unwind (as in Figure 15).
- Figure 15: Stylised diagram showing the connection between the sector forecast, the dynamic path and the steady-state path
