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Using forecast evaluation to improve the accuracy of the Greenbook forecast

  • Arai, Natsuki
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    Recently, Patton and Timmermann (2012) proposed a more powerful kind of forecast efficiency regression at multiple horizons, and showed that it provides evidence against the efficiency of the Fed’s Greenbook forecasts. I use their forecast efficiency evaluation to propose a method for adjusting the Greenbook forecasts. Using this method in a real-time out-of-sample forecasting exercise, I find that it provides modest improvements in the accuracies of the forecasts for the GDP deflator and CPI, but not for other variables. The improvements are statistically significant in some cases, with magnitudes of up to 18% in root mean square prediction error.

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    File URL: http://www.sciencedirect.com/science/article/pii/S016920701300037X
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    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 30 (2014)
    Issue (Month): 1 ()
    Pages: 12-19

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    Handle: RePEc:eee:intfor:v:30:y:2014:i:1:p:12-19
    Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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    1. repec:taf:jnlbes:v:30:y:2012:i:1:p:1-17 is not listed on IDEAS
    2. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
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    7. Rochelle M. Edge & Refet S. Gurkaynak, 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 209-259.
    8. David Reifschneider & Peter Tulip, 2007. "Gauging the uncertainty of the economic outlook from historical forecasting errors," Finance and Economics Discussion Series 2007-60, Board of Governors of the Federal Reserve System (U.S.).
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    10. Todd E. Clark & Michael W. McCracken, 2009. "Nested forecast model comparisons: a new approach to testing equal accuracy," Working Papers 2009-050, Federal Reserve Bank of St. Louis.
    11. West, Kenneth D., 2006. "Forecast Evaluation," Handbook of Economic Forecasting, Elsevier.
    12. Peter Tulip, 2009. "Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1217-1231, 09.
    13. Todd E. Clark & Michael W. McCracken, 2011. "Advances in forecast evaluation," Working Papers 2011-025, Federal Reserve Bank of St. Louis.
    14. Faust, Jon & Wright, Jonathan H., 2009. "Comparing Greenbook and Reduced Form Forecasts Using a Large Realtime Dataset," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 468-479.
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