The objective is to investigate the foundations for economic forecasting using macro-econometric models and to apply the results in the context of a small model of the macro economy. Current evidence suggests that the economy is an evolutionary entity that is subject to intermittent regime shifts.
Econometric models capture such a complicated process very imperfectly.
Forecasting theory requires extension to incorporate such difficulties, especially allowing for non-stationarities due to unit roots and regime shifts. Techniques exist that can make forecasts more robust than those produced by macroeconomic models alone. In particular, differencing and intercept corrections can help remove systematic biases in model-based forecasts. However, their use increases the variability of forecast error and the research project will develop statistical procedures which mitigate that variability. Combining different approaches to exploit differential susceptibility to break points provides one alternative intercept correction.