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What univariate models tell us about multivariate macroeconomic models

James Mitchell, Donald Robertson and Stephen Wright

EMF Research Papers from Economic Modelling and Forecasting Group

Abstract: A longstanding puzzle in macroeconomic forecasting has been that a wide variety of multivariate models have struggled to out-predict univariate representations. We seek an explanation for this puzzle in terms of population properties. We show that if we just know the univariate properties of a time-series, yt, this can tell us a lot about the dimensions and the predictive power of the true (but unobservable) multivariate macroeconomic model that generated yt. We illustrate using data on U.S. inflation. We find that, especially in recent years, the univariate properties of inflation dictate that even the true multivariate model for inflation would struggle to out-predict a univariate model. Furthermore, predictions of changes in inflation from the true model would either need to be IID or have persistence properties quite unlike those of most current macroeconomic models.

Keywords: Forecasting; Macroeconomic Models; Autoregressive Moving Average Representations; Predictive Regressions; Nonfundamental Representations; Inflation Forecasts JEL Classification Numbers: C22; C32; C53; E37 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
References: View references in EconPapers View complete reference list from CitEc

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