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Forecasting Economic Aggregates by Disaggregates

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  • Hendry, David F
  • Hubrich, Kirstin

Abstract

We explore whether forecasting an aggregate variable using information on its disaggregate components can improve the prediction mean squared error over first forecasting the disaggregates and then aggregating those forecasts, or, alternatively, over using only lagged aggregate information in forecasting the aggregate. We show theoretically that the first method of forecasting the aggregate should outperform the alternative methods in population. We investigate whether this theoretical prediction can explain our empirical findings and analyse why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of euro area and US inflation in some situations, but not in others.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5485.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5485

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Keywords: disaggregate information; factor models; forecast model selection; predictability; VAR;

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