In this paper we assess the possibility of producing unbiased forecasts for fiscal variables in the euro area by comparing a set of procedures that rely on different information sets and econometric techniques. In particular, we consider ARMA models, VARs, small scale semi-structural models at the national and euro area level, institutional forecasts (OECD), and pooling. Our small scale models are characterized by the joint modelling of fiscal and monetary policy using simple rules, combined with equations for the evolution of all the relevant fundamentals for the Maastricht Treaty and the Stability and Growth Pact. We rank models on the basis of their forecasting performance using the mean square and mean absolute error criteria at different horizons. Overall, simple time series methods and pooling work well and are able to deliver unbiased forecasts, or slightly upward biased forecast for the debt-GDP dynamics. This result is mostly due to the short sample available, the robustness of simple methods to structural breaks, and to the difficulty of modelling the joint behaviour of several variables in a period of substantial institutional and economic changes. A bootstrap experiment highlights that, even when the data are generated using the estimated small scale multi country model, simple time series models can produce more accurate forecasts, due to their parsimonious specification.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
5294.
Find related papers by JEL classification: C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David F. Hendry & Michael P. Clements, 2004.
"Pooling of forecasts,"
Econometrics Journal,
Royal Economic Society, vol. 7(1), pages 1-31, 06.
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David Hendry & Michael P. Clements, 2001.
"Pooling of Forecasts,"
Economics Papers
2002-W9, Economics Group, Nuffield College, University of Oxford.
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Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2003.
"Dating the Euro Area Business Cycle,"
Working Papers
237, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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