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Measuring Predictability: Theory and Macroeconomic Applications

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Abstract

We propose a measure of predictability based on the ratio of the expected loss of a short-run forecast to the expected loss of a long-run forecast. This predictability measure can be tailored to the forecast horizons of interest, and it allows for general loss functions, univariate or multivariate information sets, and stationary or nonstationary data. We propose a simple estimator, and we suggest resampling methods for inference. We then provide several macroeconomic applications. First, based on fitted parametric models, we assess the predictability of a variety of macroeconomic series. Second, we analyze the internal propagation mechanism of a standard dynamic macroeconomic model by comparing predictability of model inputs and model outputs. Third, we use predictability as a metric for assessing the similarity of data simulated from the model and actual data. Finally, we sketch several promising directions for future research.

Suggested Citation

  • Francis X. Diebold & Lutz Kilian, "undated". "Measuring Predictability: Theory and Macroeconomic Applications," CARESS Working Papres 97-19, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  • Handle: RePEc:wop:pennca:97-19
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      • Diebold, F.X. & Kilian, L. & Nerlove, Marc, 2006. "Time Series Analysis," Working Papers 28556, University of Maryland, Department of Agricultural and Resource Economics.
    23. Francis X. Diebold & Marc Nerlove, 1988. "Unit roots in economic time series: a selective survey," Finance and Economics Discussion Series 49, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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