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Testing for Differences in Path Forecast Accuracy: Forecast-Error Dynamics Matter

Andrew Martinez ()

No 1717, Working Paper from Federal Reserve Bank of Cleveland

Abstract: Although the trajectory and path of future outcomes plays an important role in policy decisions, analyses of forecast accuracy typically focus on individual point forecasts. However, it is important to examine the path forecasts errors since they include the forecast dynamics. We use the link between path forecast evaluation methods and the joint predictive density to propose a test for differences in system path forecast accuracy. We also demonstrate how our test relates to and extends existing joint testing approaches. Simulations highlight both the advantages and disadvantages of path forecast accuracy tests in detecting a broad range of differences in forecast errors. We compare the Federal Reserve’s Greenbook point and path forecasts against four DSGE model forecasts. The results show that differences in forecast-error dynamics can play an important role in the assessment of forecast accuracy.

Keywords: GFESM; log determinant; log score; mean square error (search for similar items in EconPapers)
JEL-codes: C12 C22 C52 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-for
Date: 2017-11-02
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