Are there any Reliable Leading Indicators for U.S. Inflation and GDP Growth?
Massimiliano Giuseppe Marcellino
European University Institute; Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)
European University Institute - Department of Economics; University of Oxford - Department of Economics
University of Ljubljana - Faculty of Economics
IGIER Working Paper No. 236
In this paper we evaluate the relative merits of three approaches to information extraction from a large data set for forecasting, namely, the use of an automated model selection procedure, the adoption of a factor model, and single-indicator-based forecast pooling. The comparison is conducted using a large set of indicators for forecasting US inflation and GDP growth. We also compare our large set of leading indicators with purely autoregressive models, using an evaluation procedure that is particularly relevant for policy making. The evaluation is conducted both ex-post and in a pseudo real time context, for several forecast horizons, and using both recursive and rolling estimation. The results indicate a preference for simple forecasting tools, with a good relative performance of pure autoregressive models, and substantial instability in the leading characteristics of the indicators.
Number of Pages in PDF File: 46
Keywords: Leading indicator, factor model, model selection, GDP growth, inflation
JEL Classification: C53, E37, C50working papers series
Date posted: June 13, 2003
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