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Smooth and persistent forecasts of German GDP: Balancing accuracy and stability

Author

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  • Heinisch, Katja
  • van Norden, Simon
  • Wildi, Marc

Abstract

Forecasts that minimize mean squared forecast error (MSE) often exhibit excessive volatility, limiting their practical applicability. We address this accuracy smoothness trade-off by introducing a Multivariate Smooth Sign Accuracy (M-SSA) framework, which extracts smoothed components from leading indicators to enhance the signal-to-noise ratio and control the forecast volatility and timing. Applied to quarterly German GDP growth, our method yields smoothed forecasts that can improve forecasting accuracy, particularly over medium-term horizons. We find that while smoother forecasts tend to lag slightly around turning points, this can be offset by adjusting the forecast horizon. These findings highlight the practicality of the M-SSA framework for both forecasters and policymakers,

Suggested Citation

  • Heinisch, Katja & van Norden, Simon & Wildi, Marc, 2026. "Smooth and persistent forecasts of German GDP: Balancing accuracy and stability," IWH Discussion Papers 1/2026, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:335681
    DOI: 10.18717/dp99kr-7336
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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