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Understanding and Forecasting Aggregate and Disaggregate Price Dynamics

  • D'Agostino, Antonello

    (Central Bank and Financial Services Authority of Ireland)

  • Bermingham, Colin

    (Central Bank and Financial Services Authority of Ireland)

The issue of forecast aggregation is to determine whether it is better to forecast a series directly or instead construct forecasts of its components and then sum these component forecasts. Notwithstanding some underlying theoretical results, it is gener- ally accepted that forecast aggregation is an empirical issue. Empirical results in the literature often go unexplained. This leaves forecasters in the dark when confronted with the option of forecast aggregation. We take our empirical exercise a step further by considering the underlying issues in more detail. We analyse two price datasets, one for the United States and one for the Euro Area, which have distinctive dynamics and provide a guide to model choice. We also consider multiple levels of aggregation for each dataset. The models include an autoregressive model, a factor augmented autoregressive model, a large Bayesian VAR and a time-varying model with stochastic volatility. We find that once the appropriate model has been found, forecast aggrega- tion can significantly improve forecast performance. These results are robust to the choice of data transformation.

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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 8/RT/10.

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Date of creation: Aug 2010
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Handle: RePEc:cbi:wpaper:8/rt/10
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  4. Tobias, Justin & Zellner, Arnold, 2000. "A Note on Aggregation, Disaggregation and Forecasting Performance," Staff General Research Papers 12024, Iowa State University, Department of Economics.
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  9. repec:eui:euiwps:eco2010/11 is not listed on IDEAS
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  11. Kirstin Hubrich, 2004. "Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?," Computing in Economics and Finance 2004 230, Society for Computational Economics.
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  17. Massimiliano Marcellino & James H. Stock & Mark W. Watson, . "Macroeconomic Forecasting in the Euro Area: Country Specific versus Area-Wide Information," Working Papers 201, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  18. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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