Forecasting developing Asian economies during normal times and large external shocks:
Approaches and challenges
Predicting future economic trends appropriately is essential to economic policy making.
Currently, the DSGE model approach is a benchmark economic forecasting technique widely
employed. However, large external shocks, such as large-scale natural disasters and
COVID-19, challenge current approaches to economic forecasting. Multiple approaches
will be needed in this situation, including reduced-form model and indicator-based
approaches. This paper discusses different forecasting approaches, by comparing forecasts
during normal times and crisis periods. The Medium-term Projection Framework (MPF),
used in the Economic Outlook for Southeast Asia, China and India series, receives
particular attention. The paper also examines challenges unique to developing Asia
and large external shock periods. The measurement of potential output, difficulties
in modelling the credit channel, and the incorporation of Big Data pose challenges
regarding developing Asian countries, and large external shocks may force deviation
from assumptions of traditional frameworks such as rational expectations. Finally,
this paper points out that natural disasters will be a useful proxy for large shocks
in Developing Asia.
Published on May 27, 2021
In series:OECD Development Centre Working Papersview more titles