The importance of non-linearities in large forecasting models with stochastic error processes

This paper considers the consequences of the stochastic error process in large non-linear forecasting models. As such models are non-linear, the deterministic forecast is neither the mean nor the mode of the density function of the endogenous variables. Under a specific assumption as to the class of the non-linearity it is shown that the deterministic forecast is actually the vector of marginal medians of the density function. Stochastic simulation techniques are then used to test whether one large forecasting model actually lies within this class.