Estimating time variation in measurement error from data revisions: an application to backcasting and forecasting in dynamic models

George Kapetanios and Anthony Yates ()
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George Kapetanios: Queen Mary, University of London, London, UK, Postal: Queen Mary, University of London, London, UK

Journal of Applied Econometrics, 2010, vol. 25, issue 5, pages 869-893

Abstract: Over time, economic statistics are refined. This implies that data measuring recent economic events are typically less reliable than older data. Such time variation in measurement error affects optimal forecasts. Measurement error, and its time variation, are of course unobserved. Our contribution is to show how estimates of these can be recovered from the variance of revisions to data using a behavioural model of the statistics agency. We illustrate the gains in forecasting performance from exploiting these estimates using a real-time dataset on UK aggregate expenditure data. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2010
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