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Combining disaggregate forecasts or combining disaggregate information to forecast an aggregate

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  • Hendry, David F.
  • Hubrich, Kirstin

Abstract

To forecast an aggregate, we propose adding disaggregate variables, instead of combining forecasts of those disaggregates or forecasting by a univariate aggregate model. New analytical results show the effects of changing coefficients, mis-specification, estimation uncertainty and mis-measurement error. Forecast origin shifts in parameters affect absolute, but not relative, forecast accuracies; mis-specification and estimation uncertainty induce forecast-error differences, which variable-selection procedures or dimension reductions can mitigate. In Monte Carlo simulations, different stochastic structures and interdependencies between disaggregates imply that including disaggregate information in the aggregate model improves forecast accuracy. Our theoretical predictions and simulations are corroborated when forecasting aggregate US inflation pre- and post 1984 using disaggregate sectoral data. JEL Classification: C51, C53, E31

Suggested Citation

  • Hendry, David F. & Hubrich, Kirstin, 2010. "Combining disaggregate forecasts or combining disaggregate information to forecast an aggregate," Working Paper Series 1155, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101155
    Note: 1325881
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    References listed on IDEAS

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    More about this item

    Keywords

    aggregate forecasts; disaggregate information; forecast combination; inflation;
    All these keywords.

    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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