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Forecasting with a noncausal VAR model

  • Nyberg , Henri

    ()

    (Department of Political and Economic Studies, and HECER, University of Helsinki)

  • Saikkonen, Pentti

    ()

    (Department of Mathematics and Statistics, and HECER, University of Helsinki, and the Monetary Policy and Research Department of the Bank of Finland)

We propose simulation-based forecasting methods for the noncausal vector autoregressive model proposed by Lanne and Saikkonen (2012). Simulation or numerical methods are required because the prediction problem is generally nonlinear and, therefore, its analytical solution is not available. It turns out that different special cases of the model call for different simulation procedures. Simulation experiments demonstrate that gains in forecasting accuracy are achieved by using the correct noncausal VAR model instead of its conventional causal counterpart. In an empirical application, a noncausal VAR model comprised of U.S. inflation and marginal cost turns out superior to the best-fitting conventional causal VAR model in forecasting inflation.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1233.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 33/2012.

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Length: 38 pages
Date of creation: 09 Nov 2012
Date of revision:
Handle: RePEc:hhs:bofrdp:2012_033
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. John Geweke, 1995. "Monte Carlo simulation and numerical integration," Staff Report 192, Federal Reserve Bank of Minneapolis.
  2. Lanne, Markku & Luoto, Jani, 2013. "Autoregression-based estimation of the new Keynesian Phillips curve," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 561-570.
  3. James M. Nason & Gregor W. Smith, 2008. "Identifying the new Keynesian Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(5), pages 525-551.
  4. Lanne, Markku & Saikkonen, Pentti, 2013. "Noncausal Vector Autoregression," Econometric Theory, Cambridge University Press, vol. 29(03), pages 447-481, June.
  5. Gefang, Deborah & Koop, Gary & Potter, Simon M., 2008. "The Dynamics of UK and US Inflation Expectations," SIRE Discussion Papers 2008-59, Scottish Institute for Research in Economics (SIRE).
  6. Canova, Fabio, 2007. "G-7 Inflation Forecasts: Random Walk, Phillips Curve Or What Else?," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 1-30, February.
  7. Lof Matthijs, 2013. "Noncausality and asset pricing," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(2), pages 211-220, April.
  8. repec:att:wimass:9417 is not listed on IDEAS
  9. 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.
  10. Lanne, Markku & Luoto, Jani & Saikkonen, Pentti, 2012. "Optimal forecasting of noncausal autoregressive time series," International Journal of Forecasting, Elsevier, vol. 28(3), pages 623-631.
  11. Rubaszek, Michal & Skrzypczynski, Pawel, 2008. "On the forecasting performance of a small-scale DSGE model," International Journal of Forecasting, Elsevier, vol. 24(3), pages 498-512.
  12. Athanasopoulos, George & Vahid, Farshid, 2008. "VARMA versus VAR for Macroeconomic Forecasting," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 237-252, April.
  13. Lanne, Markku & Saikkonen, Pentti, 2010. "Noncausal autoregressions for economic time series," MPRA Paper 32943, University Library of Munich, Germany.
  14. Markku Lanne & Arto Luoma & Jani Luoto, 2012. "Bayesian Model Selection And Forecasting In Noncausal Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(5), pages 812-830, 08.
  15. Breid, F. Jay & Davis, Richard A. & Lh, Keh-Shin & Rosenblatt, Murray, 1991. "Maximum likelihood estimation for noncausal autoregressive processes," Journal of Multivariate Analysis, Elsevier, vol. 36(2), pages 175-198, February.
  16. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September.
  17. Henri Nyberg & Markku Lanne & Erkka Saarinen, 2012. "Does noncausality help in forecasting economic time series?," Economics Bulletin, AccessEcon, vol. 32(4), pages 2849-2859.
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