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Predicting the direction of change in aggregate demand growth and its components

  • Hamid Baghestani

    ()

    (Department of Economics, American University of Sharjah)

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    In this study, we set up a framework to generate the forecasts of growth in aggregate demand and its components using real-time data. In general, these forecasts (for 1983-2008) accurately predict directional change under symmetric loss and are thus of value to a user who assigns similar cost (loss) to incorrect upward and downward predictions. Our model is simple yet useful, especially to economically-rational agents who tend to balance the predictive benefit of a forecast against the cost of gathering and processing information. We conclude by suggesting that the success of our model may have to do with the stationary behavior of the series as well as monetary policy that aims to achieve sustainable growth with stable prices.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I1-P25.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 1 ()
    Pages: 292-302

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    Handle: RePEc:ebl:ecbull:eb-09-00760
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    1. Pesaran, H.M. & Timmermann, A., 2003. "How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?," Cambridge Working Papers in Economics 0306, Faculty of Economics, University of Cambridge.
    2. Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 291-298.
    3. Ash, J. C. K. & Smyth, D. J. & Heravi, S. M., 1998. "Are OECD forecasts rational and useful?: a directional analysis," International Journal of Forecasting, Elsevier, vol. 14(3), pages 381-391, September.
    4. Joutz, Fred & Stekler, H. O., 2000. "An evaluation of the predictions of the Federal Reserve," International Journal of Forecasting, Elsevier, vol. 16(1), pages 17-38.
    5. Baghestani, Hamid & Kherfi, Samer, 2008. "How well do U.S. consumers predict the direction of change in interest rates?," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(4), pages 725-732, November.
    6. Leitch, Gordon & Tanner, J Ernest, 1991. "Economic Forecast Evaluation: Profits versus the Conventional Error Measures," American Economic Review, American Economic Association, vol. 81(3), pages 580-90, June.
    7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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