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Abstract

This paper compares the forecasting performance of three different econometric models for the Eurozone and the USA: a vector auto regression (VAR), a Bayesian vector auto regression (BVAR), and a structural vector error correction model (SVEC). The forecast evaluation is based on 19 vintages of real time data for output, inflation rates, interest rates, the exchange rate and the money stock from the fourth quarter of 2004 until the first quarter of 2010. The oil price is used as the only exogenous variable in the model. Imposing a stringent set of long-run assumptions on the econometric model results in less accurate forecasts. The difference is significant for several variables and forecast horizons. Reducing the comparison to data from the pre-financial crisis period reduces the size of forecast errors but does not change the overall picture.

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Bibliographic Info

Paper provided by WIFO in its series WIFO Working Papers with number 399.

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Length: 61 pages
Date of creation: 30 Aug 2011
Date of revision:
Handle: RePEc:wfo:wpaper:y:2011:i:399

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Keywords: Eurozone; USA; econometric models; forecasting performance;

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-09-05 (All new papers)
• NEP-CBA-2011-09-05 (Central Banking)
• NEP-FOR-2011-09-05 (Forecasting)

References

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1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
2. Robert B. Litterman, 1984. "Specifying vector autoregressions for macroeconomic forecasting," Staff Report 92, Federal Reserve Bank of Minneapolis.
3. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
   
   • Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
   • Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
   • Tom Doan, . "DMARIANO: RATS procedure to compute Diebold-Mariano Forecast Comparison Test," Statistical Software Components RTS00055, Boston College Department of Economics.
4. Paul Gaggl & Serguei Kaniovski & Klaus Prettner & Thomas Url, 2009. "The short and long-run interdependencies between the Eurozone and the USA," Empirica, Springer, vol. 36(2), pages 209-227, May.
5. Michael P. Clements & David F. Hendry, 2008. "Economic Forecasting in a Changing World," Capitalism and Society, De Gruyter, vol. 3(2), pages 1.
6. Christopher A. Sims & Tao Zha, 1996. "Bayesian methods for dynamic multivariate models," Working Paper 96-13, Federal Reserve Bank of Atlanta.
   
   • Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.

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