Fundamentals of a new macro-modelling approach: with application to explaining and forecasting output growth

The paper proposes a fundamentally new approach to explaining and predicting growth, and empirically compares the relative success, in terms of average mean-squared-errors, of forecasts of alternative modelling methods applied to two well-known multi-equation macroeconomic models fitted to Australian data for the period 1961/62 to 1986/87. The gain in relative efficiency from the new approach is found to be up to 130 percent over the modelling procedures currently used in macroeconomic studies.