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Encompassing the Forecasts of U.S. Trade Balance Models


  • Ericsson, Neil R
  • Marquez, Jaime


Yock Y. Chong and David F. Hendry (1986) propose the concept of forecast encompassing--the lack of additional information in another model's forecasts. The corresponding test statistic is based on the regression of one model's forecast errors on the other model's forecasts. This paper generalizes Chong and Hendry's statistic to include sets of dynamic nonlinear models with uncertain estimated coefficients generating multistep forecasts with possibly systematic biases. Using stochastic simulation, the generalized statistic is applied to forecasts over 1985Q1-1987Q4 from six models of the U.S. merchandise trade balance, revealing misspecification in all models. Copyright 1993 by MIT Press.

Suggested Citation

  • Ericsson, Neil R & Marquez, Jaime, 1993. "Encompassing the Forecasts of U.S. Trade Balance Models," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 19-31, February.
  • Handle: RePEc:tpr:restat:v:75:y:1993:i:1:p:19-31

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    References listed on IDEAS

    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Andrews, Donald W. K. & Fair, Ray C., 1992. "Estimation of polynomial distributed lags and leads with end point constraints," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 123-139.
    3. Fair, Ray C, 1993. "Testing the Rational Expectations Hypothesis in Macroeconometric Models," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 169-190, April.
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    Cited by:

    1. Massimiliano Marcellino, "undated". "Further Results on MSFE Encompassing," Working Papers 143, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Matthews, Kent & Minford, Patrick & Naraidoo, Ruthira, 2008. "Vicious and virtuous circles -- The political economy of unemployment in interwar UK and USA," European Journal of Political Economy, Elsevier, vol. 24(3), pages 605-614, September.
    3. Antonis Michis, 2012. "Monitoring Forecasting Combinations with Semiparametric Regression Models," Working Papers 2012-02, Central Bank of Cyprus.
    4. Ericsson, Neil R., 2017. "How biased are U.S. government forecasts of the federal debt?," International Journal of Forecasting, Elsevier, vol. 33(2), pages 543-559.
    5. Neil R. Ericsson, 2000. "Predictable uncertainty in economic forecasting," International Finance Discussion Papers 695, Board of Governors of the Federal Reserve System (U.S.).
    6. West, Kenneth D., 2001. "Encompassing tests when no model is encompassing," Journal of Econometrics, Elsevier, vol. 105(1), pages 287-308, November.
    7. Ericsson, Neil R., 2016. "Eliciting GDP forecasts from the FOMC’s minutes around the financial crisis," International Journal of Forecasting, Elsevier, vol. 32(2), pages 571-583.
    8. Neil R. Ericsson, 2001. "Forecast uncertainty in economic modeling," International Finance Discussion Papers 697, Board of Governors of the Federal Reserve System (U.S.).
    9. David F. Hendry & Michael P. Clements, 2004. "Pooling of forecasts," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 1-31, June.
    10. Martinez, Andrew B., 2015. "How good are US government forecasts of the federal debt?," International Journal of Forecasting, Elsevier, vol. 31(2), pages 312-324.
    11. Gibson, Heather D. & Lazaretou, Sophia, 2001. "Leading inflation indicators for Greece," Economic Modelling, Elsevier, vol. 18(3), pages 325-348, August.
    12. Neil R. Ericsson, 2008. "The Fragility of Sensitivity Analysis: An Encompassing Perspective," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(s1), pages 895-914, December.
    13. Alexander N. Bogin & William M. Doerner & William D. Larson, 2016. "Missing the Mark: House Price Index Accuracy and Mortgage Credit Modeling," Staff Working Papers 16-04, Federal Housing Finance Agency.
    14. repec:oxf:wpaper:727 is not listed on IDEAS
    15. Julia Campos & Neil R. Ericsson & David F. Hendry, 2005. "General-to-specific modeling: an overview and selected bibliography," International Finance Discussion Papers 838, Board of Governors of the Federal Reserve System (U.S.).

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