A Critical Note on the Forecast Error Variance Decomposition
AbstractThe paper questions the reasonability of using forecast error variance decompositions for assessing the role of different structural shocks in business cycle fluctuations. It is shown that the forecast error variance decomposition is related to a dubious definition of the business cycle. A historical variance decomposition approach is proposed to overcome the problems related to the forecast error variance decomposition. --
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Bibliographic InfoPaper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-065.
Date of creation: 2008
Date of revision:
Business Cycles; Structural Vector Autoregression Models; Forecast Error Variance Decomposition; Historical Variance Decomposition;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-ECM-2008-10-21 (Econometrics)
- NEP-ETS-2008-10-21 (Econometric Time Series)
- NEP-FOR-2008-10-21 (Forecasting)
- NEP-MAC-2008-10-21 (Macroeconomics)
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- Gachet, Ivan & Maldonado, Diego & Pérez, Wilson, 2008.
"Determinantes de la Inflación en una Economía Dolarizada: El Caso Ecuatoriano
[Determinants of Inflation in a Dollarized Economy: The Case of Ecuador]," MPRA Paper 17101, University Library of Munich, Germany.
- Seymen, Atilim & Kappler, Marcus, 2009. "The role of structural common and country-specific shocks in the business cycle dynamics of the G7 countries," ZEW Discussion Papers 09-015, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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