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Forecasting Economic and Financial Variables with Global VARs

  • M. Hashem Pesaran
  • Til Schuermann
  • L. Vanessa Smith

This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end a global vector autoregressive (GVAR) model previously estimated over the 1979Q1-2003Q4 period by Dees, de Mauro, Pesaran, and Smith (2007), is used to generate out-of-sample one quarter and four quarters ahead forecasts of real output, inflation, real equity prices, exchange rates and interest rates over the period 2004Q1-2005Q4. Forecasts are obtained for 134 variables from 26 regions made up of 33 countries covering about 90% of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the effects of model and estimation uncertainty on forecast outcomes are examined by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem, and the heterogeneity of economies considered — industrialised, emerging, and less developed countries — as well as the very real likelihood of possibly multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed the double-averaged GVAR forecasts performed better than the benchmark competitors, especially for output, inflation and real equity prices.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-03/cesifo1_wp2263.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2263.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2263
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  1. Garcia, R. & Perron, P., 1990. "An Anlysis Of The Real Interest Rate Under Regime Shifts," Papers 353, Princeton, Department of Economics - Econometric Research Program.
  2. Pesaran, M.H. & Weiner, S.M., 2001. "Modelling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Cambridge Working Papers in Economics 0119, Faculty of Economics, University of Cambridge.
  3. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  4. Favero, Carlo A. & Kaminska, Iryna & Söderström, Ulf, 2005. "The Predictive Power of the Yield Spread: Further Evidence and A Structural Interpretation," CEPR Discussion Papers 4910, C.E.P.R. Discussion Papers.
  5. 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.
  6. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
  7. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14(1), pages C45-C90, February.
  8. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  9. Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010. "Forecast Combinations," Working Papers 2010-04, Banco de México.
  10. Dees, S. & Holly, S. & Pesaran, M.H. & Smith, L.V., 2007. "Long Run Macroeconomic Relations in the Global Economy," Cambridge Working Papers in Economics 0703, Faculty of Economics, University of Cambridge.
  11. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," CESifo Working Paper Series 1425, CESifo Group Munich.
  12. James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
  13. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  14. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  15. Katrin Assenmacher-Wesche & M. Hashem Pesaran, 2008. "Forecasting the Swiss Economy Using VECX* Models: An Exercise in Forecast Combination Across Modelsand Observation Windows," Working Papers 2008-03, Swiss National Bank.
  16. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
  17. M. Hashem Pesaran & Andreas Pick, 2008. "Forecasting Random Walks Under Drift Instability," CESifo Working Paper Series 2293, CESifo Group Munich.
  18. Alogoskoufis, George & Smith, Ron, 1991. " On Error Correction Models: Specification, Interpretation, Estimation," Journal of Economic Surveys, Wiley Blackwell, vol. 5(1), pages 97-128.
  19. Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," G.R.E.Q.A.M. 96a09, Universite Aix-Marseille III.
  20. Hamilton, James Douglas & Kim, Dong Heon, 2000. "A Re-examination of the Predictability of Economic Activity Using the Yield Spread," University of California at San Diego, Economics Working Paper Series qt69v8p1m9, Department of Economics, UC San Diego.
  21. Chudik , A. & Pesaran, M.H., 2007. "Infinite Dimensional VARs and Factor Models," Cambridge Working Papers in Economics 0757, Faculty of Economics, University of Cambridge.
  22. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
  23. repec:cup:cbooks:9780521632423 is not listed on IDEAS
  24. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, vol. 137(1), pages 134-161, March.
  25. Clements, Michael P. & Hendry, David F., 2006. "Forecasting with Breaks," Handbook of Economic Forecasting, Elsevier.
  26. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  27. Schorfheide, Frank, 2000. "Forecasting Economic Time Series," Econometric Theory, Cambridge University Press, vol. 16(03), pages 441-450, June.
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