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on Forecasting |
| By: | Tapas K. Mishra |
| Abstract: | Demography-based income forecasting has recently gained enormous popu- larity. Malmberg and Lindh (ML, 2005) in an important contribution forecast global income by incorporating demographic age information where the vari- ables were assumed to be stationary. Drawing on the insights from recent theoretical and empirical advances, in this paper we re-examine the stationary assumption and argue in favour of a more flexible framework where ’stationar- ity’ is a limiting condition of the stochastic demographic behavior. Based on Mishra and Urbain (2005) where we showed that the age-specific population display varied long-term and short-term dynamics, we invest this idea in the present paper for long-term projections of per capita income (till 2050) of a set of developed and developing countries and the World income. We find that GDP forecast that corroborates demographic information have higher forecasts than without demographic information - a result consistent with ML, but we find that embedding ’memory’ features of demographic variables lead to higher forecast that ML. The relevance of stochastic shocks in GDP forecasting is drawn in this paper and implications of these forecast in the presence of fluc- tuating age-shares in those countries are discussed. |
| Keywords: | Global income forecasting, Long memory, Demographic components, Economic growth. |
| JEL: | C13 E32 E43 E63 J11 C33 O47 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2006-17&r=for |
| By: | Massimo Guidolin; Carrie Fangzhou Na |
| Abstract: | We address one interesting case - the predictability of excess US asset returns from macroeconomic factors within a flexible regime switching VAR framework - in which the presence of regimes may lead to superior forecasting performance from forecast combinations. After having documented that forecast combinations provide gains in prediction accuracy and these gains are statistically significant, we show that combinations may substantially improve portfolio selection. We find that the best performing forecast combinations are those that either avoid estimating the pooling weights or that minimize the need for estimation. In practice, we report that the best performing combination schemes are based on the principle of relative, past forecasting performance. The economic gains from combining forecasts in portfolio management applications appear to be large. |
| Keywords: | Forecasting |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-059&r=for |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee |
| Abstract: | We evaluate the forecast performance of a range of theory-based and atheoretical models explaining exchange rates and interest rates in US, UK and Japan. The decision-making environment is fully described for an investor who optimally allocates portfolio shares to domestic and foreign assets. Methods necessary to compute and use forecasts in this context are proposed, including the means of combining density forecasts to deal with model uncertainty. An out-of-sample evaluation exercise covering the 1990’s is described, comparing statistical criteria with decision-based criteria. The theory-based models are found to perform relatively well when their forecasts are judged by their economic value. |
| Keywords: | Model Averaging, Buy and Hold, Exchange rate and interest rate forecasts. |
| JEL: | C32 C53 E17 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0616&r=for |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Gary Koop; Shaun P. Vahey |
| Abstract: | A recent revision to the preliminary measurement of GDP(E) growth for 2003Q2 caused considerable press attention, provoked a public enquiry and prompted a number of reforms to UK statistical reporting procedures. In this paper, we compute the probability of “substantial revisions” that are greater (in absolute value) than the controversial 2003 revision. The predictive densities are derived from Bayesian model averaging over a wide set of forecasting models including linear, structural break and regime-switching models with and without heteroskedasticity. Ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures recent improvements in the quality of preliminary UK macroeconomic measurements. |
| Keywords: | Revisions, Structural Breaks, Regime Switching, Model Uncertainty, Bayesian Model Averaging, Predictive Densities. |
| JEL: | E01 C11 C32 C53 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0617&r=for |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee; Emi Mise; Kalvinder Shields |
| Abstract: | This paper describes an approach that accommodates in a coherent way three types of uncertainty when measuring the output gap. These are trend uncertainty (associated with the choice of model and de-trending technique), estimation uncertainty (with a given model) and data uncertainty (associated with the reliability of data). The approach employs VAR models to explain real time measures and realisations of output series jointly along with Bayesian-style ‘model averaging’ procedures. Probability forecasts provide a comprehensive representation of the output gap and the associated uncertainties in real time. The approach is illustrated using a real time dataset for the UK over 1961q2 — 2005q4. |
| Keywords: | Output gap, real time data, revisions, Hodrick-Prescott trend, exponential smoothing trend, moving average trend, model uncertainty, probability forecasts. |
| JEL: | E52 E58 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0618&r=for |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee; Emi Mise; Kalvinder Shields |
| Abstract: | Methods are described for the appropriate use of data obtained and analysed in real time to represent the output gap. The methods employ cointegrating VAR techniques to model real time measures and realisations of output series jointly. The model is used to mitigate the impact of data revisions; to generate appropriate forecasts that can deliver economically-meaningful output trends and that can take into account the end-of-sample problems associated with the use of the Hodrick-Prescott filter in measuring these trends; and to calculate probability forecasts that convey in a clear way the uncertainties associated with the gap measures. The methods are applied to data for the US 1965q4-2004q4 and the improvements over standard methods are illustrated. |
| Keywords: | Output gap measurement, real time data, data revision, HP end-points, probability forecasts. |
| JEL: | E52 E58 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0619&r=for |
| By: | David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Bo, MALMBERG |
| Abstract: | Aging of the population will affect the growth path of all countries. To assess the historical and future importance of this claim we use two popular approaches and evaluate their merits and disadvantages by confronting them to Swedish data. We first stimulate an endogenous growth. Rising longevity increases the incentive to get education, which in turn has ever-lasting effects on growth through a human capital externality. Secondly, we consider a reduced-form statistical model based on the demographic dividend literature. Assuming that there is a common DGP guiding growth through the demographic transition, we use an estimate from post-war global data to backcast the Swedish historical GDP growth. Comparing the two approaches, encompassing tests show that each of them contains independent information on the Swedish growth path, suggesting that there is a benefit from combining them for long-term forecasting |
| Keywords: | Demographic Transition, Life Expectancy, Education, Income Growth |
| JEL: | J11 O41 I20 N33 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006037&r=for |
| By: | Ágeir Daníelsson; Lúdvík Elíasson; Magnús F. Gudmundsson; Björn A. Hauksson; Ragnhildur Jónsdóttir; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson |
| Abstract: | This paper documents and describes the new Quarterly Macroeconomi Model of the Central Bank of Iceland (qmm). qmm and the underlying quar terly database have been under construction since 2001 at the Research and Forecasting Division of the Economics Department at the Bank. qmm is used by the Bank for forecasting and various policy simulations and therefore play a key role as an organisational framework for viewing the medium-term futur when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of qmm. Analysis of the steady state properties of the model are currently under way and will be reported in a separate paper in the near future. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp32&r=for |
| By: | Glenn D. Rudebusch; Brian P. Sack; Eric T. Swanson |
| Abstract: | Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. We investigate these implications using both a structural model and a reduced-form framework. We show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the literature. |
| Keywords: | Interest rates ; Economic forecasting ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-46&r=for |
| By: | Sandra Poncet |
| Abstract: | This study develops long-term forecasts for world economic growth, based on a production function according to which an economy can grow by (1) deploying more inputs (labor and capital inputs) to production and/or by (2) becoming more efficient, i.e. producing more output per unit of input. An econometric analysis of past performance is carried out to describe the process by which physical capital accumulates over time and to estimate the parameters of a catch-up model of technology diffusion. We moreover account for the modification of real exchange rates against the US dollar. The results suggest that today’s advanced economies are to become a shrinking part of the world economy: in less than 50 years, China and India together could match the size of the US in current dollars (26.6 against 26.9% of the world GDP in 2050). China and India will stand out as an engine of new demand growth and spending, their GDP will grow at yearly average rate of 4.6 and 4.5%, respectively between 2005 and 2050. The largest economies in the world (by GDP) may no longer be the richest (in terms of income per capita). |
| Keywords: | Growth projections; emerging countries; human capital; technology diffusion; convergence |
| JEL: | O10 O40 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2006-16&r=for |
| By: | Jokipii, Terhi (Bank of Finland Research) |
| Abstract: | This paper studies the extent to which market crashes are predictable for a set of six countries, focusing in particular on possible differences between transition economies (The Czech Republic, Hungary and Poland) and mature markets (UK, US and EU). We estimate a set of individual country and pooled specifications to find that market crashes, in the broader sense, are predictable for all countries analysed. We additionally investigate the role that investor heterogeneity, proxied by trading volume, plays in this predictability and find some varying results between countries. For the Central and Eastern European Countries (CE3), an increase in trading volume relative to trend appears to have great predictive power, a result that is supportive of the theory of investor heterogeneity outlined in the relevant background studies. For the more mature markets (G5), on the other hand, market crashes appear more likely to follow a period of increased stock prices and returns, a result fitting a number of traditional theories, in particular the stochastic bubble model. Further analysis, allowing for time-varying coefficients, confirms the volume-crash relationship for the CE3 and provides preliminary evidence that macro news releases may additionally contribute to the predictability of market crashes. |
| Keywords: | aggregate market returns; skewness; trading volume; market crash |
| JEL: | C14 G12 G15 |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_022&r=for |