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Forecasting developing Asian economies during normal times and large external shocks: Approaches and challenges

Author

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  • Kensuke Tanaka
Abstract
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. Il est essentiel de prévoir de manière appropriée les futures tendances économiques pour étayer les décisions de politique économique. Actuellement, l'approche modèle DSGE (d'équilibre général dynamique et stochastique) est une technique de prévision économique de référence largement utilisée. Cependant, les chocs externes importants, tels que les catastrophes naturelles à grande échelle et le COVID-19, posent des défis dans les prévisions économiques. L'utilisation de diverses approches, en particulier celle en forme réduite et celles fondées sur des indicateurs, sera grandement utile. Ce papier examine différentes approches de prévision, en comparant les prévisions en temps normal et en période de crise. Il observe notamment le cadre de projection à moyen terme (MPF) utilisé dans les projections de la série Perspectives économiques de l'Asie du Sud-Est, la Chine et l'Inde de l’OCDE. Le papier examine ensuite les défis de la prévision qui sont uniques aux pays asiatiques en développement ou aux grandes périodes de chocs externes. La mesure des résultats potentiels, des difficultés à modéliser le canal du crédit bancaire et l'intégration du « Big Data » sont des défis pour les pays d'Asie en développement, tandis que les chocs externes importants peuvent forcer la distanciation des cadres économiques traditionnels, tels que les anticipations rationnelles. Le papier montre enfin que les catastrophes naturelles représentent un indicateur utile des chocs importants dans l'Asie en développement.

Suggested Citation

  • Kensuke Tanaka, 2021. "Forecasting developing Asian economies during normal times and large external shocks: Approaches and challenges," OECD Development Centre Working Papers 345, OECD Publishing.
    • Handle: RePEc:oec:devaaa:345-en
    DOI: 10.1787/5a1c4c48-en
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    More about this item

    Keywords

    COVID-19; Developing Asia; DSGE model; Forecasting; large external shocks; natural disasters; time series analysis;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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