## Model specification and forecast accuracy

Forecasters and policy decision-makers often have to choose a model to use from a whole range of different models, all claiming to represent the economy (or the part of it that is the focal point of the forecasting exercise). The current range of wage and price models that can be used for inflation forecasting provides an example. As we have discussed earlier, in Chapter 9, inflation targeting implies that the central bank’s conditional forecast 1-2 years ahead becomes the intermediate target of monetary policy. Consequently, there is a strong linkage between model choice, forecasting, and policy analysis in this case.

The statistical foundation for a conditional forecast as an operational target is that forecasts calculated as the conditional mean are unbiased and no other predictor (...

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