The Comparative Forecast Performance of Univariate and Multivariate Models

24 Pages Posted: 16 Dec 1996

See all articles by Prasad V. Bidarkota

Prasad V. Bidarkota

Florida International University (FIU) - Department of Economics

Date Written: July 1996

Abstract

Does the use of information on the past history of the nominal interest rates and inflation entail improvement in forecasts of the ex ante real interest rate over its forecasts obtained from using just the past history of the realized real interest rates? To answer this question we set up a univariate unobserved components model for the realized real interest rates and a bivariate model for the nominal rate and inflation which imposes cointegration restrictions between them. The two models are estimated under normality with the Kalman filter. It is found that the error-correction model provides more accurate one-period ahead forecasts of the real rate within the estimation sample, whereas the unobserved components model yields forecasts with smaller forecast variances. In the post-sample period, the forecasts from the bivariate model are not only more accurate but also have tighter confidence bounds than the forecasts from the unobserved components model.

JEL Classification: E37, E47, E31

Suggested Citation

Bidarkota, Prasad V., The Comparative Forecast Performance of Univariate and Multivariate Models (July 1996). Available at SSRN: https://ssrn.com/abstract=1386 or http://dx.doi.org/10.2139/ssrn.1386

Prasad V. Bidarkota (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

University Park, DM 320A
Florida International University
Miami, FL 33199
United States
305-348-6362 (Phone)
305-348-1524 (Fax)

HOME PAGE: http://www.fiu.edu/~bidarkot/

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