The Role of the Log Transformation in Forecasting Economic Variables
For forecasting and economic analysis many variables are used in logarithms (logs). In time series analysis this transformation is often considered to stabilize the variance of a series. We investigate under which conditions taking logs is beneficial for forecasting. Forecasts based on the original series are compared to forecasts based on logs. It is found that it depends on the data generation process whether the former or the latter are preferable. For a range of economic variables substantial forecasting improvements from taking logs are found if the log transformation actually stabilizes the variance of the underlying series. Using logs can be damaging for the forecast precision if a stable variance is not achieved.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markku Lanne, Helmut Luetkepohl, 2006.
"Identifying Monetary Policy Shocks via Changes in Volatility,"
Economics Working Papers
ECO2006/23, European University Institute.
- Markku Lanne & Helmut Lütkepohl, 2008. "Identifying Monetary Policy Shocks via Changes in Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1131-1149, 09.
- Markku Lanne & Helmut Luetkepohl, 2006. "Identifying Monetary Policy Shocks viaChanges in Volatility," CESifo Working Paper Series 1744, CESifo Group Munich.
- Christopher A. Sims & Tao Zha, 2006.
"Were There Regime Switches in U.S. Monetary Policy?,"
American Economic Review,
American Economic Association, vol. 96(1), pages 54-81, March.
- Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
- Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Christopher A. Sims & Daniel F. Waggoner & Tao Zha, 2006.
"Methods for inference in large multiple-equation Markov-switching models,"
2006-22, Federal Reserve Bank of Atlanta.
- Sims, Christopher A. & Waggoner, Daniel F. & Zha, Tao, 2008. "Methods for inference in large multiple-equation Markov-switching models," Journal of Econometrics, Elsevier, vol. 146(2), pages 255-274, October.
- Ari�o, M.A. & Franses, Ph.H.B.F., 1996.
"Forecasting the Levels of Vector Autoregressive Log-Transformed Time Series,"
Econometric Institute Research Papers
EI 9669-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Arino, Miguel A. & Franses, Philip Hans, 2000. "Forecasting the levels of vector autoregressive log-transformed time series," International Journal of Forecasting, Elsevier, vol. 16(1), pages 111-116.
- Krämer, Walter & Davies, Laurie, 2000.
"Testing for unit roots in the context of misspecified logarithmic random walks,"
2000,30, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
- Kramer, Walter & Davies, Laurie, 2002. "Testing for unit roots in the context of misspecified logarithmic random walks," Economics Letters, Elsevier, vol. 74(3), pages 313-319, February.
- Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
- Franses, Philip Hans & Koop, Gary, 1998. "On the sensitivity of unit root inference to nonlinear data transformations," Economics Letters, Elsevier, vol. 59(1), pages 7-15, April.
- SILVESTRINI, Andrea & SALTo, Matteo & MOULIN, Laurent & VEREDAS, David, .
"Monitoring and forecasting annual public deficit every month: the case of France,"
CORE Discussion Papers RP
-2019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Andrea Silvestrini & Matteo Salto & Laurent Moulin & David Veredas, 2008. "Monitoring and forecasting annual public deficit every month: the case of France," Empirical Economics, Springer, vol. 34(3), pages 493-524, June.
- Valentina Corradi & Norman R. Swanson, 2003.
"The Effect of Data Transformation on Common Cycle, Cointegration and Unit Root Tests: Monte Carlo Results and a Simple Test,"
Departmental Working Papers
200322, Rutgers University, Department of Economics.
- Corradi, Valentina & Swanson, Norman R., 2006. "The effect of data transformation on common cycle, cointegration, and unit root tests: Monte Carlo results and a simple test," Journal of Econometrics, Elsevier, vol. 132(1), pages 195-229, May.
- Granger, C. W. J. & Newbold, P., 1976. "The use of R2 to determine the appropriate transformation of regression variables," Journal of Econometrics, Elsevier, vol. 4(3), pages 205-210, August.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2591. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.