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How useful are time-varying parameter models for forecasting economic growth in CESEE?

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Abstract

Empirical evidence has shown that a prerequisite for generating reliable macroeconomic forecasts is either the inclusion of a large information set or modeling time variation in the models’ parameters and volatilities. In this paper we examine these claims in a comparative manner, forecasting GDP growth for six CESEE economies. We use Bayesian techniques and evaluate the models based on both the accuracy of their point forecasts as well as the degree of uncertainty surrounding these predictions. Our results indicate that forecasts from a fully-fledged time-varying parameter model tend to outperform those from its constant parameter competitors. Adding more information, e.g. from other countries, by contrast, does not improve forecast performance significantly for most of the countries under study. Last, we analyze whether it pays to forecast GDP growth indirectly by summing up forecasts of GDP components. This approach yields competitive forecasts, yet it preserves an economic interpretation of the underlying drivers for the economic growth forecasts, which is of crucial importance from a practitioner’s view.

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  • Martin Feldkircher & Nico Hauzenberger, 2019. "How useful are time-varying parameter models for forecasting economic growth in CESEE?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/19, pages 29-48.
  • Handle: RePEc:onb:oenbfi:y:2019:i:q1/19:b:2
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    More about this item

    Keywords

    forecasting; CESEE; time-varying parameter; aggregate GDP forecast;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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