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VAR Forecasting Models of the Australian Economy: A Preliminary Analysis

  • Robert G. Trevor

    (Reserve Bank of Australia)

  • Susan J. Thorp

    (Reserve Bank of Australia)

Vector autoregressions (VARs) have been proposed as good forecasting models of macroeconomic variables. This paper presents three naive VAR models of the Australian economy estimated on quarterly data for fifteen variables to 1985(4). Their performance in “forecasting” the calendar and financial year outcomes for 1986–87 (on an ex-ante basis) is compared with that of three sets of private sector forecasts, the 1986–87 Budget forecasts and the actual outcomes from the same period. In general, the VAR forecasts perform at least as well or better than comparable private sector forecasts. Each VAR model is estimated using a different method for allowing for trends in the data. The detrending procedure is an important determinant of the quality of forecasts, with the best forecasts produced by the two models which employ detrending processes appropriate for data which follow a random walk.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp8802.

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Date of creation: Jan 1988
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Handle: RePEc:rba:rbardp:rdp8802
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