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VAR Estimation and Forecasting When Data Are Subject to Revision

  • N. Kundan Kishor
  • Evan F. Koenig

We show that Howrey’s method for producing economic forecasts when data are subject to revision is easily generalized to handle the case where data are produced by a sophisticated statistical agency. The proposed approach assumes that government estimates are efficient with a finite lag. It takes no stand on whether earlier revisions are the result of “news” or of reductions in “noise.” We present asymptotic performance results in the scalar case and illustrate the technique using several simple models of economic activity. In each case, it outperforms both conventional VAR analysis and the original Howrey method. It produces GDP forecasts that are competitive with those of professional forecasters. Special cases and extensions of the analysis are discussed in a series of appendices that are available online.

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Article provided by Taylor & Francis Journals in its journal Journal of Business & Economic Statistics.

Volume (Year): 30 (2009)
Issue (Month): 2 (July)
Pages: 181-190

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Handle: RePEc:taf:jnlbes:v:30:y:2009:i:2:p:181-190
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  1. Charles Nelson & Eric Zivot, 2000. "Why are Beveridge-Nelson and Unobserved-Component Decompositions of GDP so Different?," Econometric Society World Congress 2000 Contributed Papers 0692, Econometric Society.
  2. Evan F. Koenig & Sheila Dolmas & Jeremy M. Piger, 2002. "The use and abuse of 'real-time' data in economic forecasting," Working Papers 2001-015, Federal Reserve Bank of St. Louis.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  5. Howrey, E Philip, 1984. "Data Revision, Reconstruction, and Prediction: An Application to Inventory Investment," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 386-93, August.
  6. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 251-87, April.
  7. Howrey, E Philip, 1978. "The Use of Preliminary Data in Econometric Forecasting," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 193-200, May.
  8. Dean Croushore & Charles L. Evans, 2003. "Data revisions and the identification of monetary policy shocks," Working Papers 03-1, Federal Reserve Bank of Philadelphia.
  9. Francis X. Diebold & Glenn D. Rudebusch, 1989. "Forecasting output with the composite leading index: an ex ante analysis," Finance and Economics Discussion Series 90, Board of Governors of the Federal Reserve System (U.S.).
  10. repec:tpr:qjecon:v:109:y:1994:i:1:p:241-65 is not listed on IDEAS
  11. Evans, George W, 1989. "Output and Unemployment Dynamics in the United States: 1950-1985," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(3), pages 213-37, July-Sept.
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