Forecasting Economic Aggregates by Disaggregates

David Hendry and Kirstin Hubrich

No 5485, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We explore whether forecasting an aggregate variable using information on its disaggregate components can improve the prediction mean squared error over first forecasting the disaggregates and then aggregating those forecasts, or, alternatively, over using only lagged aggregate information in forecasting the aggregate. We show theoretically that the first method of forecasting the aggregate should outperform the alternative methods in population. We investigate whether this theoretical prediction can explain our empirical findings and analyse why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of euro area and US inflation in some situations, but not in others.

Keywords: Disaggregate information; Predictability; Forecast model selection; Var; Factor models (search for similar items in EconPapers)
JEL-codes: C51 C53 E31 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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Working Paper: Forecasting economic aggregates by disaggregates (2006)
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