Log versus level in VAR forecasting: 16 Million empirical answers - expect the unexpected
The use of log-transformed data has become standard in macroeconomic forecasting with VAR models. However, its appropriateness in the context of out-of-sample forecasts has not yet been exposed to a thorough empirical investigation. With the aim of filling this void, a broad sample of VAR models is employed in a multi-country setup and approximately 16 Mio. pseudo-out-of-sample forecasts are evaluated. The results show that, on average, the knee-jerk transformation of the data is at best harmless.
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- 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.
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- Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
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