Forecasting macroeconomic variables using a structural state space model

de Silva, Ashton (2008): Forecasting macroeconomic variables using a structural state space model.

Abstract

This paper has a twofold purpose; the first is to present a small macroeconomic model in state space form, the second is to demonstrate that it produces accurate forecasts. The first of these objectives is achieved by fitting two forms of a structural state space macroeconomic model to Australian data. Both forms model short and long run relationships. Forecasts from these models are subsequently compared to a structural vector autoregressive specification. This comparison fulfills the second objective demonstrating that the state space formulation produces more accurate forecasts for a selection of macroeconomic variables.

• Item Type: MPRA Paper
• Language: English
• Keywords: State space, multivariate time series, macroeconomic model, forecast, SVAR
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods

References

Aoki, M. & Havenner, A. (1991), ‘State space modeling of multiple time series’, Econometric Reviews 10, 1–59.

Balke, N. S. & Wohar, M. E. (2002), ‘Low-frequency movements in stock prices: a state-space decomposition’, The Review of Economics and Statistics 84(4), 649– 667.

Berkelmans, L. (2005), Credit and monetary policy: An australian SVAR, Technical report, Reserve Bank of Australia.

Buncic, D. & Melecky, M. (2008), ‘An estimated new Keynesian policy model for Australia’, The Economic Record 84(264), 1–16.

Diebold, F. X. & Mariano, R. S. (1995), ‘Comparing Predictive Accuracy’, Journal of Business and Economic Statistics 5, 253–263.

Dixon, P., Parmenter, B., Sutton, J. & Vincent, D. (1997), ORANI: A Multisectoral Model of the Australian Economy, North Holland.

Dixon, P. & Rimmer, M. (2002), Dynamic General Equilibriun Modelling For Forecasting And Policy, North Holland.

Dungey, M. & Pagan, A. (2000), ‘A structural VAR of the Australian economy’, The Economic Record 76, 321–342.

Durbin, J. & Koopman, S. (2001), Time Series Analysis by State Space Method, Oxford.

Fry, R., Hocking, J. & Martin, V. (2008), ‘The role of portfolio shoocks in a structural autoregressive model of the australian economy’, The Economic Record 84(264), 17–33.

Harvey, A. C. (1989), Forecasting, structural time series models and the Kalman filter, Cambridge University Press, Cambridge.

Harvey, A. & Jaeger, A. (1993), ‘Detrending, stylised facts and the business cycle’, Journal of Applied Econometrics 8, 231–247.

Hyndman, R. J. (2001), ‘It’s time to move from ’what’ to ’why”, International Journal of Forecasting 17, 567–570.

Hyndman, R. & Koehler, A. B. (2006), ‘Another look at measures of forecast accuracy’, International Journal of Forecasting 22, 679–688.

Matheson, T. (2006), Assessing the fit of small open economy dsges, Technical report, Reserve Bank of New Zealand.

Moosa, I. (1998), ‘An investigation into the cyclical behaviour of output, money, stock prices and interest rates’, Applied Economic Letters 5, 235–238.

Morley, J. C. (2002), ‘A state-space approach to calculating the Beveridge-Nelson decomposition’, Economics Letters 75, 123–127.

Morley, J. C., Nelson, C. R. & Zivot, E. (2003), ‘Why are the Beveridge-Nelson and unobserved-components decompositions of GDP so different?’, The Review of Economics and Statistics 75(2), 235–243.

Nimark, K. (2007), A structural model of australia as a small open economy, Technical report, Reserve Bank of Australia.

Pagan, A. (2003), An examination of some tools for macro-econometric model building, in ‘METU Lecture at ERC Conference VII, Ankara’.

Panher, G. S. (2007), ‘Modelling and controlling monetary and economic identities with constrained state space models’, International Statistical Reveiw 75, 150–169.

Proietti, T. (2002), Some reflections on trend-cycle decompositions with correlated components, Working Paper, Department of Economics, European University Institute.

Sinclair, T. (2005), Permanent and transitory movements in output and unemployment: Okun’s law persists, Working Paper, Department of Economics, Washington University