As for the individual design of a central bank’s forecast model, it may differ with respect to variable coverage, econometric rigour and the economic theory it incorporates. Basically, however, macroeconomic variables can be predicted in two different ways: structural macroeconometric models, which include traditional multi-equation models and DSGE models, and short-term forecast models, usually based on time-series analysis.
Although structural macroeconometric models remain workhorses used for forecasting and policy simulations, short-term forecast models have received increasing attention in the Eurosystem in recent years. Why is the short-term horizon so important? For the reasons I have already mentioned, monetary policy decisions require timely information on the current state of the economy. Such information is not always available, however.