Merging monthly and quarterly forecasts: Experience with mqem

Forecasts from quarterly econometric models are typically revised on a monthly basis to reflect the information in current economic data. The revision process usually involves setting targets for the quarterly values of endogenous variables for which monthly observations are available and then altering the intercept terms in the quarterly forecasting model to achieve the target values. A formal statistical approach to the use of monthly data to update quarterly forecasts is described and the procedure is applied to the Michigan Quarterly Econometric Model of the US Economy. The procedure is evaluated in terms of both ex post and ex ante forecasting performance. The ex ante results for 1986 and 1987 indicate that the method is quite promising. With a few notable exceptions, the formal procedure produces forecasts of GNP growth that are very close to the published ex ante forecasts.