nep-for New Economics Papers
on Forecasting
Issue of 2005‒10‒22
24 papers chosen by
Rob J Hyndman
Monash University

  1. How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries? By David Hauner; Kornélia Krajnyák; Martin Mühleisen; Ben Sutton; Stephan Danninger
  3. Three Attempts at Inflation Forecasting in Pakistan By Madhavi Bokil; Axel Schimmelpfennig
  4. Forecasting Thailand's Core Inflation By Tao Sun
  5. Does Money Matter for Inflation in the Euro Area? By Peter Kugler; Sylvia Kaufmann
  6. Revenue Forecasts as Performance Targets By Stephan Danninger
  7. The Political Economy of Revenue-Forecasting Experience from Low-Income Countries By Annette Kyobe; M. Cangiano; Stephan Danninger
  8. Revenue Forecasting--How is it done? Results from a Survey of Low-Income Countries By Annette Kyobe; Stephan Danninger
  9. Ghostbusting: Which Output Gap Measure Really Matters? By Andreas Billmeier
  10. Measuring a Roller Coaster: Evidence on the Finnish Output Gap By Andreas Billmeier
  11. How Stable is the Forecasting Performance of the Yield Curve for Outpot Growth? By Rossi, Barbara; Giacomini, Raffaella
  12. Estimation of Economic Growth in France Using Business Survey Data By Alain N. Kabundi
  13. Can the IMF's Medium-Term Growth Projections Be Improved? By Juan Zalduendo; Catia Batista
  14. Forecast Combination and Model Averaging using Predictive Measures By Eklund, Jana; Karlsson, Sune
  15. Assessing Early Warning Systems: How Have They Worked in Practice? By Eduardo Borensztein; Catherine A. Pattillo; Andrew Berg
  16. Quantitative Assessment of a Financial System--Barbados By Kevin Greenidge; Karen Chase; Winston Moore; DeLisle Worrell
  17. Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? By Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual
  18. The Greenbook and U.S. Monetary Policy By Robert Tchaidze
  19. How Useful Is Monetary Econometrics in Low-Income Countries? The Case of Money Demand and the Multipliers in Rwanda By C. Gabriel Di Bella; David Hauner
  20. Understanding Order Flow By Martin D. D. Evans (Georgetown University) and Richard K. Lyons (U.C. Berkeley and NBER)
  21. Public Information and Electoral Bias By Taylor, Curtis; Yildirim, Huseyin
  22. Post-Transition Investment Behavior in Poland: A Sectoral Panel Analysis By Zuzana Murgasova
  23. Why India Can Grow at 7 Percent a Year or More: Projections and Reflections By Dani Rodrik; Arvind Subramanian
  24. Subordinated Levy Processes and Applications to Crude Oil Options By Noureddine Krichene

  1. By: David Hauner; Kornélia Krajnyák; Martin Mühleisen; Ben Sutton; Stephan Danninger
    Abstract: This paper compares Canadian central government budget forecasting with forecasting by other industrial countries. While fiscal forecasting in Canada is governed by one of the strongest institutional frameworks, quantitative analysis suggests that budget projections of macroeconomic and fiscal aggregates have been more cautious than in other countries since the mid-1990s. The relatively volatile macroeconomic environment as well as institutional factors, such as Canada's asymmetric deficit target, have likely contributed to this outcome.
    Keywords: Revenues , Developed countries , Economic forecasting , Forecasting models ,
    Date: 2005–04–07
  2. By: Bharat Barot (National Institute of Economic Research)
    Abstract: This study evaluates the performance of the eight most important Swedish domestic forecasters of real GDP-growth, CPI-inflation and unemployment for the sample period 1993-2001. The evaluation is based on the following measures: mean absolute error, the root mean square error, bias and finally directional accuracy. The forecasts are even compared to naive random walk and random walk with drift models. The results indicate that the current forecasts compared to the year ahead forecasts decline over the forecasting horizons as more information becomes available. The results with respect to the directional accuracy indicate that we are equally good/bad in predicting the directional accuracy for all three macro aggregates. According to the comparisons with the naive random walk model six out of seven Swedish CPI-inflation forecasters were outperformed by the naive random walk model. Tests of bias indicate that the Swedish forecasters underestimate GDP-growth and overestimate CPI-inflation and the unemployment rate for the sample period. All the Swedish forecasters have been successful in predicting the downward trend in CPI-inflation and the unemployment rate. The performance of the Swedish domestic forecasters is better using preliminary GDP-growth outcomes than final. The performance for the current year forecasts is better than the year ahead forecasts for all three macro economic variables. Revisions are positively biased. Key words Mean absolute error, root mean square error, directional accuracy, bias, revisions, final respective preliminary outcomes, Theil index, naïve forecasts
    JEL: E
    Date: 2005–10–19
  3. By: Madhavi Bokil; Axel Schimmelpfennig
    Abstract: This paper presents three empirical approaches to forecasting inflation in Pakistan. The preferred approach is a leading indicators model in which broad money growth and private sector credit growth help forecast inflation. A univariate approach also yields reasonable forecasts, but seems less suited to capturing turning points. A vector autoregressive (VAR) model illustrates how monetary developments can be described by a Phillips-curve type relationship. We deal with potential parameter instability on account of fundamental changes in Pakistan's economic system by restricting our sample to more recent observations. Gregorian and Islamic calendar seasonality are addressed by using 12-month moving averages.
    Keywords: Forecasting models , Pakistan , Inflation ,
    Date: 2005–06–08
  4. By: Tao Sun
    Abstract: This paper develops an approach for forecasting in Thailand core inflation. The key innovation is to anchor the projections derived from the short-term time-series properties of core inflation to its longer-run evolution. This involves combining a short-term model, which attempts to distill the forecasting power of a variety of monthly indicators purely on goodness-of-fit criteria, with an equilibrium-correction model that pins down the convergence of core inflation to its longer-run structural determinants. The result is a promising model for forecasting Thai core inflation over horizons up to 10, 24, and 55 months, based on a root mean-squared error criterion as well as a mean absolute error criterion.
    Keywords: Forecasting models , Thailand , Inflation ,
    Date: 2004–06–14
  5. By: Peter Kugler (University of Basel, Petersplatz 1, CH-4003 Basel,Switzerland); Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna)
    Abstract: This paper analyses the role of M3 as an indicator for future inflation and correspondingly for current monetary policy in the euro area. We analyse the short and long run interrelationship between inflation and money growth in an error correction framework taking into account the output gap and short and long term interest rates. We find robust cointegration between money growth and inflation. In the long run, shocks in M3-growth account for 33 percent to 40 percent of the inflation forecast error variance. The effects of output gap and interest rate shocks on inflation are mainly transitory and there forecasting variance shares are negligible for medium term horizons. There is evidence for a second regime prevailing at the end of the seventies and beginning of the eighties which relates to periods of high interest rate and inflation rate levels and decreasing rates in real money growth. Overall, we present firm evidence for a stable dynamic relationship between money growth and inflation which implies that the deviation of the real money growth from its long run average is a good indicator of future inflation acceleration or deceleration. Of course, this finding provides evidence in favour of the recently de-emphasised first pillar of the ECB strategy. According to our results, however, an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%.
    Date: 2005–09–19
  6. By: Stephan Danninger
    Abstract: Budget revenue forecasts should be best estimates of expected receipts. Often they are not. This paper analyzes the rationale for overstated revenue forecasts and derives conditions for intentional biases. A theoretical model demonstrates that overstated revenue forecasts can be the result of the government's attempt to boost unobserved revenue collection effort. If positive forecast errors are costly and undermine public credibility of budget expenditure plans, the reverse outcome is possible and governments may understate revenue forecasts. A case study for Azerbaijan is presented in support of the former incentive motive.
    Keywords: Revenues , Azerbaijan , Forecasting models ,
    Date: 2005–02–02
  7. By: Annette Kyobe; M. Cangiano; Stephan Danninger
    Abstract: This paper analyzes interference and timeliness in the revenue-forecasting process, using new data on revenue-forecasting practices in low-income countries. Interference is defined as the occurrence of a significant deviation from purely technical forecasts. A theoretical model explains forecasting interference through government corruption. The data broadly supports the model, and the results are robust to alternative explanations. The paper also constructs three indices-transparency, formality, and organizational simplicity-that characterize revenue-forecasting practices, and assesses their effectiveness in producing an upfront-that is, timely-budget envelope. More transparent and simple forecasting processes lead to early budget constraints, while formality has no measurable effect.
    Keywords: Political economy , Revenues , Low income developing countries , Corruption , Economic forecasting , Forecasting models ,
    Date: 2005–01–13
  8. By: Annette Kyobe; Stephan Danninger
    Abstract: This paper takes stock of revenue forecasting practices in low-income countries, and provides a comprehensive and condensed account of the revenue forecasting process. Based on a new dataset on 34 low-income countries, it catalogues forecasting practices and procedures from inception until budget submission, focusing primarily on institutional aspects and processes. The paper also synthesizes three key characteristics of forecasting practices, formality, organizational simplicity, and transparency, and empirically explores their determinants. High levels of country corruption are associated with less formal and less transparent forecasts. Past IMF involvement in a country increases the formality of the process, but does not improve public access to information.
    Keywords: Revenues , Low income developing countries , Budget estimates , Economic forecasting ,
    Date: 2005–02–10
  9. By: Andreas Billmeier
    Abstract: This paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries.
    Keywords: Production , Inflation , Economic forecasting ,
    Date: 2004–08–18
  10. By: Andreas Billmeier
    Abstract: The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap.
    Keywords: Production , Finland , Inflation , Economic forecasting ,
    Date: 2004–04–20
  11. By: Rossi, Barbara; Giacomini, Raffaella
    Abstract: We provide an extensive evaluation of the predictive performance of the U.S. yield curve for U.S. GDP growth by using a new test for forecast breakdown as well as a variety of in-sample and out-of-sample testing procedures. Empirical research over the past decades uncovered a strong predictive relationship between the yield curve and output growth. However, the parameter estimates that describe this empirical relationship were not stable over time. We document the existence of a forecast breakdown in this relationship over the past three decades, and find it relevant especially in the seventies and eighties. We also provide empirical support for the theoretical conjecture that the cause of the forecast failure is closely linked to changes in the monetary policy of the Fed.
    JEL: C22 C52 C53
  12. By: Alain N. Kabundi
    Abstract: This paper proposes a new way of computing a coincident indicator for economic activity in France using data from business surveys. We use the generalized dynamic factor model à la Forni and others (2000) to extract common components from a large number of survey observations. The results obtained show that the resulting indicator forecasts economic activity with a relatively high degree of accuracy before the release of actual data.
    Keywords: Economic growth , France , Forecasting models , Data collection , Data analysis ,
    Date: 2004–05–12
  13. By: Juan Zalduendo; Catia Batista
    Abstract: Numerous reports have noted that the IMF's medium-term growth projections are overly optimistic, raising questions as to how these can be improved. To this end, we estimate a growth model and examine its out-of-sample forecasting properties relative to those of IMF projections. The model's projections outperform those of the IMF in all regions and among most income groups-projections are less biased (one-quarter of the IMF bias) and have smaller standard errors (20 percent lower root mean squared errors) even after controlling for the IMF's macroeconomic assumptions. The paper does not attempt to address the criticisms that have been leveled against the empirical growth literature, but the results suggest that benefits can be derived from bringing systematic analysis to bear on cross-country information.
    Keywords: Economic growth , Forecasting models ,
    Date: 2004–11–05
  14. By: Eklund, Jana (Department of Economic Statistics); Karlsson, Sune (Department of Economics, Statistics and Informatics)
    Abstract: We extend the standard approach to Bayesian forecast combination by forming the weights for the model averaged forecast from the predictive likelihood rather than the standard marginal likelihood. The use of predictive measures of fit offers greater protection against in-sample overfitting and improves forecast performance. For the predictive likelihood we show analytically that the forecast weights have good large and small sample properties. This is confirmed in a simulation study and an application to forecasts of the Swedish inflation rate where forecast combination using the predictive likelihood outperforms standard Bayesian model averaging using the marginal likelihood.
    Keywords: Bayesian model averaging; Predictive likelihood; Partial Bayes factor; Training sample; Inflation rate
    JEL: C11 C51 C52
    Date: 2005–09–01
  15. By: Eduardo Borensztein; Catherine A. Pattillo; Andrew Berg
    Abstract: Since 1999, the IMF's staff has been tracking several early-warning-system (EWS) models of currency crisis. The results have been mixed. One of the long-horizon models has performed well relative to pure guesswork and to available non-model-based forecasts, such as agency ratings and private analysts' currency crisis risk scores. The data do not speak clearly on the other long-horizon EWS model. The two short-horizon private sector models generally performed poorly.
    Keywords: Crisis prevention , Currencies , Economic indicators , Economic forecasting , Forecasting models , Balance of payments need ,
    Date: 2004–04–09
  16. By: Kevin Greenidge; Karen Chase; Winston Moore; DeLisle Worrell
    Abstract: A banking system module is incorporated into the Central Bank of Barbados's multisectoral macroeconomic forecasting model, and a medium-term forecast is generated for bank capitalization, profitability, liquidity and nonperforming loans. Stress tests are performed for the first year of the forecast, to test the banking system's resilience to real sector shocks. The analysis, which would in practice be only part of the vulnerability assessment, indicates that the banking system is stable and resilient to macroeconomic shocks of a type and magnitude that Barbados has experienced in the past.
    Keywords: Financial stability , Barbados , Forecasting models ,
    Date: 2005–04–22
  17. By: Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual
    Abstract: We reassess exchange rate prediction using a wider set of models that have been proposed in the last decade. The performance of these models is compared against two reference specifications-purchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error-correction specifications, and model performance is evaluated at forecast horizons of 1, 4, and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.
    Keywords: Exchange rates , Monetary measures , Productivity , Interest rates , Purchasing power parity , Forecasting models ,
    Date: 2004–05–14
  18. By: Robert Tchaidze
    Abstract: Although very attractive both theoretically and empirically, Taylor rules imply mechanical responses by the policy variable (interest rate) to fundamental ones (inflation and output gap). This study looks for empirical evidence of a more sophisticated monetary policy, one which takes into account expected future developments. An important piece of information added is the "Greenbook" forecast series, calculated by the Federal Reserve staff and which allow evaluation of expected inflation shocks. These shocks are significant in the estimated Taylor rule, confirming that policymaking is forward looking. This paper also demonstrates that a simple Taylor rule may be a misspecification if policymakers have in mind a timevarying inflation target.
    Keywords: Monetary Policy , United States ,
    Date: 2004–11–24
  19. By: C. Gabriel Di Bella; David Hauner
    Abstract: This paper revisits the usefulness of econometric monetary analysis in low-income countries in a case study on Rwanda, an interesting case given its floating exchange rate and reliance on indirect monetary policy instruments on the one hand, and its somewhat typical data and institutional shortcomings on the other hand. The findings are generally encouraging for the use of econometric models for monetary analysis in low-income countries. Notwithstanding substantial qualifications, time series and structural models of the money multiplier and money demand yield results that are statistically and economically reasonable enough to usefully inform policymaking.
    Keywords: Demand for money , Rwanda , Monetary policy , Economic models ,
    Date: 2005–09–21
  20. By: Martin D. D. Evans (Georgetown University) and Richard K. Lyons (U.C. Berkeley and NBER) (Department of Economics, Georgetown University)
    Abstract: This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the re-maining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end-user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy. Classification-JEL Codes: F3, F4, G1
    Keywords: Exchange rates, forecasting, microstructure, order flow
  21. By: Taylor, Curtis; Yildirim, Huseyin
    Abstract: We present a theory of strategic voting that predicts elections are more likely to be close and voter turnout is more likely to be high when citizens possess better public information about the composition of the electorate. These findings are disturbing because they suggest that providing more information to potential voters about aggregate political preferences (e.g., through polls, political stock markets, or expert forecasts) may actually undermine the democratic process. We show that if the distribution of preferences is common knowledge, then strategic voting leads to a stark neutrality result in which the probability that either alternative wins the election is 12. This occurs because membersof the minority compensate exactly for their smaller group size by voting with higher frequency. By contrast, when citizens are symmetrically ignorant about the distribution of types, the majority is more likely to win the election and expected voter turnout is lower. Indeed, when the population is large and voting costs are small, the majority wins with probability arbitrarily close to one in equilibrium. Welfare is, therefore, unambiguously higher when citizens possess less information about the distribution of political preferences.
  22. By: Zuzana Murgasova
    Abstract: Analyzing and projecting the behavior of macroeconomic variables in new EU member states presents special challenges, owing to limited time series of the available data. This paper presents an analysis of investment in Poland based on an underexplored sectoral data set. The determinants of investment are found to include lagged investment, lead production, relative unit labor costs, EU demand, corporate profitability, and greenfield FDI (foreign direct investment) inflows. Dynamic in-sample simulations indicate some overinvestment in 1997 compared with what the model would suggest, and a substantial underinvestment during 2000-2004. The model is then used to project future investment: while rapid investment growth is likely, it remains uncertain whether investment as a share of GDP will reach its peak levels on the late 1990s.
    Keywords: Investment , Poland , Data analysis ,
    Date: 2005–09–28
  23. By: Dani Rodrik; Arvind Subramanian
    Abstract: Using a simple growth accounting framework, we project India's future potential output growth rate through 2025. We argue that there is perhaps more upside potential than downside risks to our central estimate of annual growth, which is close to 7 percent for aggregate output, or 5.5 percent for output per capita.
    Keywords: Economic growth , India , Production ,
    Date: 2004–07–21
  24. By: Noureddine Krichene
    Abstract: One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.
    Date: 2005–09–14

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