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on Forecasting |
| By: | Christian Kascha (Norges Bank (Central Bank of Norway)); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)) |
| Abstract: | In this paper, we empirically evaluate competing approaches for combining inflation density forecasts in terms of Kullback-Leibler divergence. In particular, we apply a similar suite of models to four different data sets and aim at identifying combination methods that perform well throughout different series and variations of the model suite. We pool individual densities using linear and logarithmic combination methods. The suite consists of linear forecasting models with moving estimation windows to account for structural change. We find that combining densities is a much better strategy than selecting a particular model ex-ante. While combinations do not always perform better than the best individual model, combinations always yield accurate forecasts and, as we show analytically, provide insurance against selecting inappropriate models. Combining with equal weights often outperforms other weighting schemes. Also, logarithmic combinations can be advantageous, in particular if symmetric densities are preferred. |
| Keywords: | Forecast Combination, Logarithmic Combinations, Density Forecasts, Inflation Forecasting |
| JEL: | C53 E37 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_22&r=for |
| By: | Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper derives forecasts for euro area real GDP growth based on a bottom up approach from the production side. That is, GDP is forecast via the forecasts of value added across the different branches of activity, which is quite new in the literature. Linear regression models in the form of bridge equations are applied. In these models earlier available monthly indicators are used to bridge the gap of missing GDP data. The process of selecting the best performing equations is accomplished as a pseudo real time forecasting exercise, i.e. due account is taken of the pattern of available monthly variables over the forecast cycle. Moreover, by applying a very systematic procedure the best performing equations are selected from a pool of thousands of test bridge equations. Our modelling approach, finally, includes a further novelty which should be of particular interest to practitioners. In practice, forecasts for a particular quarter of GDP generally spread over a prolonged period of several months. We explore whether over this forecast cycle, where GDP is repeatedly forecast, the same set of equations or different ones should be used. Changing the set of bridge equations over the forecast cycle could be superior to keeping the same set of equations, as the relative merit of the included monthly indictors may shift over time owing to differences in their data characteristics. Overall, the models derived in this forecast exercise clearly outperform the benchmark models. The variables selected in the best equations for different situations over the forecast cycle vary substantially and the achieved results confirm the conjecture that allowing the variables in the bridge equations to differ over the forecast cycle can lead to substantial improvements in the forecast accuracy. JEL Classification: C22, C52, C53, E27. |
| Keywords: | Forecasting, bridge equations, euro area, GDP, bottom up approach. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080975&r=for |
| By: | Roland Döhrn; Christoph M. Schmidt; Tobias Zimmermann |
| Abstract: | In this paper we argue that future inflation in an economy depends on the way people perceive current inflation, their inflation sentiment.We construct some simple measures of inflation sentiment which capture whether price acceleration is shared by many components of the CPI basket. In a comparative analysis of the forecasting power of the different inflation indicators for the US and Germany, we demonstrate that our inflation sentiment indicators improve forecast accuracy in comparison to a standard Phillips curve approach. Because the forecast performance is particularly good for longer horizons, we also compare our indicators to traditional measures of core inflation.Here, the sentiment indicators outperform the weighted median and show a similar forecasting power as a trimmed mean. Thus, they offer a convincing alternative to traditional core inflation measures. |
| Keywords: | Inflation forecasting, monetary policy |
| JEL: | E30 E31 E37 C53 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0080&r=for |
| By: | Kirstin Hubrich; Kenneth D. West |
| Abstract: | We propose two new procedures for comparing the mean squared prediction error (MSPE) of a benchmark model to the MSPEs of a small set of alternative models that nest the benchmark. Our procedures compare the benchmark to all the alternative models simultaneously rather than sequentially, and do not require reestimation of models as part of a bootstrap procedure. Both procedures adjust MSPE differences in accordance with Clark and West (2007); one procedure then examines the maximum t-statistic, the other computes a chi-squared statistic. Our simulations examine the proposed procedures and two existing procedures that do not adjust the MSPE differences: a chi-squared statistic, and White’s (2000) reality check. In these simulations, the two statistics that adjust MSPE differences have most accurate size, and the procedure that looks at the maximum t-statistic has best power. We illustrate our procedures by comparing forecasts of different models for U.S. inflation. |
| JEL: | C32 C53 E37 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14601&r=for |
| By: | Jan Gottschalk; Ken Miyajima; Kadima D. Kalonji |
| Abstract: | This paper examines the determinants of inflation in Sierra Leone using a structural vector autoregression (VAR) approach to help forecast inflation for operational purposes. Despite data limitations, the paper accurately models inflation in Sierra Leone. As economic theory predicts, domestic inflation is found to increase with higher oil prices, higher money supply, and nominal exchange rate depreciation. The paper then employs a historical decomposition approach to pinpoint the sources of a marked decline in inflation in 2006 and assesses its forecasting properties. Overall, the model serves as a useful addition to the toolkit for analyzing and forecasting inflation in countries with limited data availability. |
| Keywords: | Inflation , Sierra Leone , Data analysis , Economic forecasting , Oil prices , Money supply , Exchange rate depreciation , Forecasting models , |
| Date: | 2008–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/271&r=for |
| By: | Marcos Álvarez Díaz (Centre de Recerca Econòmica (UIB · Sa Nostra)); Jaume Rosselló Nadal (Centre de Recerca Econòmica (UIB · Sa Nostra)) |
| Abstract: | There is a clear understanding of the benefits of getting accurate predictions that allow diminishing the uncertainty inherent to the tourism activity. Managers, entrepreneurs, politicians and many other agents related to the tourism sector need good forecasts to plan an efficient use of tourism-related resources. In spite of the consensus on this need, tourism forecasters must make an even greater effort to satisfy the industry requirements. In this paper, the possibility of improving the predictive ability of a tourism demand model with meteorological explanatory variables is investigated using the case study of monthly British tourism demand to the Balearic Islands (Spain). For this purpose, a transfer function model and a causal artificial neural network are fitted. Meanwhile, the results are compared with those obtained by non-causal methods: an ARIMA model and an autoregressive neural network. The results seem to indicate that adding meteorological variables can increase the predictive power but, however, the most accurate prediction is obtained using a non-causal model, specifically an autoregressive neural network. |
| Keywords: | Tourism, weather anomalies, climate change, transfer function modeling, United Kingdom. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pdm:wpaper:2008/2&r=for |
| By: | Michael Joyce (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Jonathan Relleen (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Steffen Sorensen (Barrie+Hibbert Ltd, Financial Economic Research, 41 Lothbury, London, EC2R 7HG., U.K.) |
| Abstract: | This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants’ expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate riskadjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. JEL Classification: E43, E44, E52. |
| Keywords: | Interest rates, forecasting, term premia. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080978&r=for |
| By: | Knut Are Aastveit (Norges Bank (Central Bank of Norway)and The University of Oslo); Tørres G. Trovik (Norges Bank (Central Bank of Norway)and The World Bank) |
| Abstract: | An approximate dynamic factor model can substantially improve the reliability of real time output gap estimates. The model extracts a common component from macroeconomic indicators, which reduces errors in the gap due to data revisions. The model's ability to handle the unbalanced arrival of data, also yields favorable nowcasting properties and thus starting conditions for the filtering of data into trend and deviations from trend. Combined with the method of augmenting data with forecasts prior to filtering, this greatly reduces the end-of-sample imprecision in the gap estimate. The increased precision has economic significance for real time policy decisions. |
| Keywords: | Output gap, Real time analysis, Monetary policy, Forecasting, Factor model |
| JEL: | C33 C53 E52 E58 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_23&r=for |
| By: | Olivier Coibion; Yuriy Gorodnichenko |
| Abstract: | This paper uses three different surveys of economic forecasts to assess both the support for and the properties of informational rigidities faced by agents. Specifically, we track the impulse responses of mean forecast errors and disagreement among agents after exogenous structural shocks. Our key contribution is to document that in response to structural shocks, mean forecasts fail to completely adjust on impact, leading to statistically and economically significant deviations from the null of full information: the half life of forecast errors is roughly between 6 months and a year. Importantly, the dynamic process followed by forecast errors following structural shocks is consistent with the predictions of models of informational rigidities. We interpret this finding as providing support for the recent expansion of research into models of informational rigidities. In addition, we document several stylized facts about the conditional responses of forecast errors and disagreement among agents that can be used to differentiate between some of the models of informational rigidities recently proposed. |
| JEL: | D84 E3 E4 E5 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14586&r=for |
| By: | Joyce, Michael (Bank of England); Relleen, Jonathan (Bank of England); Sorensen, Steffen (Barrie+Hibbert Ltd) |
| Abstract: | This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants' expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate risk-adjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. |
| Keywords: | Interest rates; forecasting; term premia |
| JEL: | E43 E44 E52 |
| Date: | 2008–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0356&r=for |
| By: | Rossi, Eduardo; Spazzini, Filippo |
| Abstract: | Multivariate GARCH models are in principle able to accommodate the features of the dynamic conditional correlations processes, although with the drawback, when the number of financial returns series considered increases, that the parameterizations entail too many parameters.In general, the interaction between model parametrization of the second conditional moment and the conditional density of asset returns adopted in the estimation determines the fitting of such models to the observed dynamics of the data. This paper aims to evaluate the interactions between conditional second moment specifications and probability distributions adopted in the likelihood computation, in forecasting volatilities and covolatilities. We measure the relative performances of alternative conditional second moment and probability distributions specifications by means of Monte Carlo simulations, using both statistical and financial forecasting loss functions. |
| Keywords: | Multivariate GARCH models; Model uncertainty; Quasi-maximum likelihood; Monte Carlo methods |
| JEL: | C32 C52 C01 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12260&r=for |
| By: | Diks, C.G.H. (Universiteit van Amsterdam); Dijk, D. van (Erasmus Universiteit Rotterdam); Panchenko, V. (University of New South Wales) |
| Abstract: | We introduce a statistical test for comparing the predictive accuracy of competing copula specifications in multivariate density forecasts, based on the Kullback-Leibler Information Criterion (KLIC). The test is valid under general conditions: in particular it allows for parameter estimation uncertainty and for the copulas to be nested or non-nested. Monte Carlo simulations demonstrate that the proposed test has satisfactory size and power properties in finite samples. Applying the test to daily exchange rate returns of several major currencies against the US dollar we find that the Student's t copula is favored over Gaussian, Gumbel and Clayton copulas. This suggests that these exchange rate returns are characterized by symmetric tail dependence. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-10&r=for |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard |
| Abstract: | This is the second of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook. |
| Keywords: | Economic forecasting , United States , Euro Area , Japan , Monetary policy , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/279&r=for |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard |
| Abstract: | This is the third of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies that incorporates oil prices and allows us to trace out the effects of shocks to oil prices. The model is estimated with Bayesian techniques. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook. |
| Keywords: | Economic forecasting , United States , Euro Area , Japan , Oil prices , Monetary policy , External shocks , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/280&r=for |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Douglas Laxton; Michel Juillard |
| Abstract: | This is the first of a series of papers that are being written as part of a project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the U.S. economy. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. After developing a benchmark model without financial-real linkages, we introduce such linkages into the model and compare the results with and without linkages. |
| Keywords: | Economic forecasting , United States , Monetary policy , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/278&r=for |
| By: | Giuseppe Ferrero (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Andrea Nobili (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are negatively correlated with the business cycle only in the United States. JEL Classification: E43, E44, E52. |
| Keywords: | Monetary policy expectations, excess returns, futures contracts, business cycle. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080979&r=for |
| By: | Massimo Guidolin (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.); Daniel L. Thornton (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.) |
| Abstract: | Despite its important role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models used to test it; however, none account for it. This paper analyzes the EH by focusing on its fundamental tenet - the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury yields implied by the EH with the forecasts from random-walk, Diebold and Lei (2006), and Duffee (2002) models. The evidence suggests that the failure of the EH is likely a consequence of market participants’ inability to predict the short-term rate. JEL Classification: E40, E52. |
| Keywords: | Expectations theory, random walk, time-varying risk premium |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080977&r=for |
| By: | Olavi Rantala |
| Abstract: | ABSTRACT : This paper describes the main features of a model developed for forecasting economic developments, energy demand and greenhouse gas emissions in the EU area and Finland as well as for simulating the economic impacts of EU climate policy. Climate policy analysis necessitates a model of the whole EU area, because CO2 emissions of the EU area emission trading sector determine the demand and price of emission allowances. The main conclusion from model simulations is that output and employment losses induced by EU climate policy in 2008-2012 will be more severe in a small open energy intensive economy like Finland than in the rest of the EU area. The negative impacts of EU climate policy on export competitiveness, exports and output volume in Finland will be strongest in the energy intensive industrial sec-tors which belong to the EU emission trading sector. |
| Keywords: | greenhouse gas emissions, economic impacts of emission reduction |
| JEL: | C5 E3 Q4 Q5 |
| Date: | 2008–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:rif:dpaper:1169&r=for |
| By: | Amund Holmsen (Norges Bank (Central Bank of Norway)); Jan F. Qvigstad (Norges Bank (Central Bank of Norway)); Øistein Røisland (Norges Bank (Central Bank of Norway)); Kristin Solberg-Johansen (Norges Bank (Central Bank of Norway)) |
| Abstract: | Monetary policy works mainly through private agents' expectations. How precisely future policy intentions are communicated has, according to theory, implications for the outcome of monetary policy. Norges Bank has gone further than most other central banks in communicating its policy intentions. The Bank publishes its own interest rate forecast, along with forecasts of inflation, the output gap, and other key variables. Moreover, Norges Bank aims to be precise about how the policy intentions are formed. The Bank currently uses optimal policy in a timeless perspective as the normative benchmark when assessing the policy intentions. Given the reaction pattern based on the timeless perspective, the Bank identifies and explains the factors that bring about a change in the interest rate forecast from one Monetary Policy Report to the next. The main arguments for publishing the interest rate forecast are discussed and validated against three years of experience with such forecasts. In this paper, we find evidence of reduced volatility in market interest rates on the days with interest rate decisions, which suggests that communicating policy intentions more precisely improves the market participants' understanding of the central bank's reaction pattern. |
| Keywords: | Transparency, optimal monetary policy, interest rate forecasts |
| JEL: | E52 E58 |
| Date: | 2008–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_20&r=for |