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What Central Bankers Need to Know about Forecasting Oil Prices

Christiane Baumeister () and Lutz Kilian ()

Staff Working Papers from Bank of Canada

Abstract: Forecasts of the quarterly real price of oil are routinely used by international organizations and central banks worldwide in assessing the global and domestic economic outlook, yet little is known about how best to generate such forecasts. Our analysis breaks new ground in several dimensions. First, we address a number of econometric and data issues specific to real-time forecasts of quarterly oil prices. Second, we develop real-time forecasting models not only for U.S. benchmarks such as West Texas Intermediate crude oil, but we also develop forecasting models for the price of Brent crude oil, which has become increasingly accepted as the best measure of the global price of oil in recent years. Third, we design for the first time methods for forecasting the real price of oil in foreign consumption units rather than U.S. consumption units, taking the point of view of forecasters outside the United States. In addition, we investigate the costs and benefits of allowing for time variation in vector autoregressive (VAR) model parameters and of constructing forecast combinations. We conclude that quarterly forecasts of the real price of oil from suitably designed VAR models estimated on monthly data generate the most accurate forecasts among a wide range of methods including forecasts based on oil futures prices, no-change forecasts and forecasts based on regression models estimated on quarterly data.

Keywords: Econometric and statistical methods; International topics (search for similar items in EconPapers)
JEL-codes: C53 E32 Q43 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-ene and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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Related works:
Journal Article: WHAT CENTRAL BANKERS NEED TO KNOW ABOUT FORECASTING OIL PRICES (2014) Downloads
Working Paper: What Central Bankers Need to Know about Forecasting Oil Prices (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-15

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