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Forecasting Economic and Financial Variables with Global VARs
February 2008 Number 317
JEL classification: C32, C51, C53
Authors: M. Hashem Pesaran, Til Schuermann, and L. Vanessa Smith
This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end, a global vector autoregressive (GVAR) model previously estimated over the 1979:Q1–2003:Q4 period by Dees, de Mauro, Pesaran, and Smith (2007) is used to generate out-of-sample one-quarter- and four-quarters-ahead forecasts of real output, inflation, real equity prices, exchange rates, and interest rates over the period 2004:Q1–2005:Q4. Forecasts are obtained for 134 variables from twenty-six regions made up of thirty-three countries and covering about 90 percent of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the paper examines the effects of model and estimation uncertainty on forecast outcomes by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem and the heterogeneity of the economies considered—industrialized, emerging, and less developed countries— as well as the very real likelihood of multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed, the double-averaged GVAR forecasts performed better than the benchmark forecasts, especially for output, inflation, and real equity prices.
For a published version of this report, see M. Hashem Pesaran, Til Schuermann, and L. Vanessa Smith, "Forecasting Economic and Financial Variables with Global VARs," International Journal of Forecasting 25, no. 4 (October - December 2009): 642-75.