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Forecasting economic aggregates by disaggregates

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  • Hendry, David F.
  • Hubrich, Kirstin

Abstract

We suggest an alternative use of disaggregate information to forecast the aggregate variable of interest, that is to include disaggregate information or disaggregate variables in the aggregate model as opposed to first forecasting the disaggregate variables separately and then aggregating those forecasts or, alternatively, using only lagged aggregate information in forecasting the aggregate. We show theoretically that the first method of forecasting the aggregate should outperform the alternative methods in population. We investigate whether this theoretical prediction can explain our empirical findings and analyse why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of euro area and US inflation in some situations, but not in others. JEL Classification: C51, C53, E31

Suggested Citation

  • Hendry, David F. & Hubrich, Kirstin, 2006. "Forecasting economic aggregates by disaggregates," Working Paper Series 589, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2006589
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    More about this item

    Keywords

    disaggregate information; factor models; forecast model selection; predictability; VAR;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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