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Forecasting Performance After an Economic Shock
Imagine an economy where inflation has been stable at 2% for several years. In Year 5, a sudden and unexpected event causes the actual inflation rate to jump to 8%. If people in this economy form their inflation expectations for a given year by simply using the actual inflation rate from the previous year, what would be their forecast error for Year 5? Furthermore, what does their resulting expectation for Year 6 imply about the model's ability to account for sudden economic changes?
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Introduction to Macroeconomics Course
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The Economy 2.0 Macroeconomics @ CORE Econ
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Forecasting Performance After an Economic Shock