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Evidence on Structural Instability in Macroeconomic Time Series Relations

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  • James H. Stock
  • Mark W. Watson

Abstract

An experiment is performed to assess the prevalence of instability in univariate and bivariate macroeconomic time series relations and to ascertain whether various adaptive forecasting techniques successfully handle any such instability. Formal tests for instability and out-of-sample forecasts from sixteen different models are computed using a sample of 76 representative U.S. monthly postwar macroeconomic time series, constituting 5700 bivariate forecasting relations. The tests indicate widespread instability in univariate and bivariate autoregressive models. However, adaptive forecasting models, in particular time varying parameter models, have limited success in exploiting this instability to improve upon fixed-parameter or recursive autoregressive forecasts.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0164.

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Date of creation: Sep 1994
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Handle: RePEc:nbr:nberte:0164

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