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Evaluating the predictive performance of trade-account models

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Author Info
Jaime Marquez
Neil R. Ericsson

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Abstract

This paper evaluates the distributional properties of forecasts from six econometric models of the U.S. trade account. Using stochastic (Monte Carlo) simulation, we derive confidence intervals and forecast-based test statistics which account for uncertainty from future disturbances and from coefficient estimation. Empirically, the confidence intervals of the trade-account forecasts are very wide, and are generally (but not necessarily) increasing with the forecast horizon. Even with such a large degree of uncertainty, some models exhibit "predictive failure" when tested. To evaluate forecasts across models, we generalize Chong and Hendry's (1986) forecast-encompassing test statistic to allow for model nonlinearity and to account for uncertainty arising from estimation. All models are rejected by this test, i.e., the data are highly informative. Although both the calculated forecast uncertainty and the test failures temper the role of these models in formulating policy, the failures imply the potential for improved model specification with narrower confidence bands.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 377.

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Date of creation: 1990
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Handle: RePEc:fip:fedgif:377

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Keywords: Forecasting ; Econometric models;

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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.:
  1. Hendry, David F., 1984. "Monte carlo experimentation in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 16, pages 937-976 Elsevier. [Downloadable!] (restricted)
  2. Fair, Ray C, 1988. "Sources of Economic Fluctuations in the United States," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 313-32, May. [Downloadable!] (restricted)
  3. Edison, Hali J. & Marquez, Jaime R. & Tryon, Ralph W., 1987. "The structure and properties of the Federal Reserve Board Multicountry Model," Economic Modelling, Elsevier, vol. 4(2), pages 115-315, April. [Downloadable!] (restricted)
  4. Peter Hooper, 1989. "Exchange rates and U.S. external adjustment in the short run and the long run," International Finance Discussion Papers 346, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier. [Downloadable!] (restricted)
  6. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259. [Downloadable!] (restricted)
  7. Neil R. Ericsson & Jaime R. Marquez, 1989. "Exact and approximate multi-period mean-square forecast errors for dynamic econometric models," International Finance Discussion Papers 348, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Hoque, Asraul & Magnus, Jan R. & Pesaran, Bahram, 1988. "The exact multi-period mean-square forecast error for the first-order autoregressive model," Journal of Econometrics, Elsevier, vol. 39(3), pages 327-346, November. [Downloadable!] (restricted)
  9. Calzolari, Giorgio, 1979. "Antithetic variates to estimate the simulation bias in non-linear models," Economics Letters, Elsevier, vol. 4(4), pages 323-328. [Downloadable!] (restricted)
  10. Neil R. Ericsson & David F. Hendry, 1989. "Encompassing and rational expectations: how sequential corroboration can imply refutation," International Finance Discussion Papers 354, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  11. Brown, Bryan W & Mariano, Roberto S, 1984. "Residual-Based Procedures for Prediction and Estimation in a Nonlinear Simultaneous System," Econometrica, Econometric Society, vol. 52(2), pages 321-43, March. [Downloadable!] (restricted)
  12. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Fisher, Paul & Salmon, Mark, 1986. "On Evaluating the Importance of Nonlinearity in Large Macroeconometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 625-46, October. [Downloadable!] (restricted)
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  14. Hendry, David F. & Richard, Jean-Francois, 1982. "On the formulation of empirical models in dynamic econometrics," Journal of Econometrics, Elsevier, vol. 20(1), pages 3-33, October. [Downloadable!] (restricted)
  15. Magnus, Jan R. & Pesaran, Bahram, 1989. "The exact multi-period mean-square forecast error for the first-order autoregressive model with an intercept," Journal of Econometrics, Elsevier, vol. 42(2), pages 157-179, October. [Downloadable!] (restricted)
  16. Fair, Ray C., 1986. "Evaluating the predictive accuracy of models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 33, pages 1979-1995 Elsevier. [Downloadable!] (restricted)
  17. Pagan, Adrian, 1989. "On the role of simulation in the statistical evaluation of econometric models," Journal of Econometrics, Elsevier, vol. 40(1), pages 125-139, January. [Downloadable!] (restricted)
  18. Cline, William R, 1989. "Macroeconomic Influences on Trade Policy," American Economic Review, American Economic Association, vol. 79(2), pages 123-27, May. [Downloadable!] (restricted)
  19. Ellen E. Meade, 1988. "Exchange rates, adjustment, and the J-curve," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 633-644.
  20. Mariano, Roberto S & Brown, Bryan W, 1983. "Asymptotic Behavior of Predictors in a Nonlinear Simultaneous System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 523-36, October. [Downloadable!] (restricted)
  21. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1987-1), pages 1-56. [Downloadable!]
  22. Helliwell, John F, 1989. "Reducing International Imbalances: Evidence from Multicountry Models," American Economic Review, American Economic Association, vol. 79(2), pages 258-63, May. [Downloadable!] (restricted)
  23. Schmidt, Peter, 1974. "The Asymptotic Distribution of Forecasts in the Dynamic Simulation of an Econometric Model," Econometrica, Econometric Society, vol. 42(2), pages 303-09, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Andrew M. Warner, 1991. "Did the debt crisis cause the investment crisis?," International Finance Discussion Papers 418, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Ian Marsh & Stephen Tokarick, 1996. "An assessment of three measures of competitiveness," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(4), pages 700-722, December. [Downloadable!] (restricted)
  3. Catherine L. Mann, 1990. "Prospects for sustained improvement in U.S. external balance: structural change versus policy change," International Finance Discussion Papers 373, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Ellen E. Meade & Charles P. Thomas, 1991. "Using external sustainability to forecast the dollar," International Finance Discussion Papers 398, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Jaime Marquez, 1992. "Real exchange rates: measurement and implications for predicting U.S. external imbalances," International Finance Discussion Papers 427, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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