Please respond: What does the forecast command actually do?

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Please respond: What does the forecast command actually do?

Postby Ansgar » Mon May 19, 2008 12:22 pm

I am sure someone knows the answer to this....

Dear all,
I was wondering whether there is documentation on what the "forecast" command actually does. I know that it puts deterministic, i.e. foreseen shocks into an otherwise stochastic model to see how the economy reacts (Tommaso's user guide page 27.) However, I would like to know the following:
-How is the deterministic shock incorporated into the policy functions? For instance, if I have a deterministic shock lasting from period 1 to 5, are the approximations to the policy functions calculated again with the presence of a deterministic shock? How is that done?
-The forecast is referred to as mean. Is this then really the conditional expectation of the respective variable given that the deterministic shock has hit the economy in periods 1 to 5?
-How is the forecast mean calculated in case of a second order approximation to the policy function? How are the expectations of the second order terms dealt with? Are those calculated using a first order approximation to the policy functions?
-If we shock the economy in period 1 to 5 let us say and choose a forecast period of 5000, will the forecast mean at some point equal the unconditional expectation of the variable?

Thank you so much for your help!!!!
Best,
Ansgar
Ansgar Rannenberg
IMK
Tel.: +49/211/7778113
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