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Forecasting U.S. money growth using economic uncertainty measures and regularisation techniques

Artur Tarassow

International Journal of Forecasting, 2019, vol. 35, issue 2, 443-457

Abstract: This paper examines the out-of-sample forecasting properties of six different economic uncertainty variables for the growth of the real M2 and real M4 Divisia money series for the U.S. using monthly data. The core contention is that information on economic uncertainty improves the forecasting accuracy. We estimate vector autoregressive models using the iterated rolling-window forecasting scheme, in combination with modern regularisation techniques from the field of machine learning. Applying the Hansen-Lunde-Nason model confidence set approach under two different loss functions reveals strong evidence that uncertainty variables that are related to financial markets, the state of the macroeconomy or economic policy provide additional informational content when forecasting monetary dynamics. The use of regularisation techniques improves the forecast accuracy substantially.

Keywords: Divisia money; Risk; Model confidence set; VAR; Forecast comparison; Shrinkage; Lasso; Machine learning (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.ijforecast.2018.09.012

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Handle: RePEc:eee:intfor:v:35:y:2019:i:2:p:443-457