Forecast Bias and MSFE Encompassing

Massimiliano Marcellino

Oxford Bulletin of Economics and Statistics, 2000, vol. 62, issue 4, 533-542

Abstract: We show that the standard condition for MSFE encompassing is no longer valid when the forecasts to be compared are biased. We propose a simple modification of such a condition and of tests for its validity. The theoretical results are illustrated by an empirical example on inflation and deficit forecasts, key variables for the formulation of monetary and fiscal policy.

Date: 2000
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