Evaluating a Global Vector Autoregression for Forecasting

27 Pages Posted: 6 Dec 2012

See all articles by Neil R. Ericsson

Neil R. Ericsson

Board of Governors of the Federal Reserve System

Erica Leigh Reisman

Government of the United States of America - Division of International Finance (IFDP)

Date Written: October 9, 2012

Abstract

Global vector autoregressions (GVARs) have several attractive features: multiple potential channels for the international transmission of macroeconomic and financial shocks, a standardized economically appealing choice of variables for each country or region examined, systematic treatment of long-run properties through cointegration analysis, and flexible dynamic specification through vector error correction modeling. Pesaran, Schuermann, and Smith (2009) generate and evaluate forecasts from a paradigm GVAR with 26 countries, based on Dées, di Mauro, Pesaran, and Smith (2007). The current paper empirically assesses the GVAR in Dées, di Mauro, Pesaran, and Smith (2007) with impulse indicator saturation (IIS) — a new generic procedure for evaluating parameter constancy, which is a central element in model-based forecasting. The empirical results indicate substantial room for an improved, more robust specification of that GVAR. Some tests are suggestive of how to achieve such improvements.

Keywords: Cointegration, error correction, forecasting, GVAR, impulse indicator saturation, model design, model evaluation, model selection, parameter constancy, VAR

JEL Classification: C32, F41

Suggested Citation

Ericsson, Neil R. and Reisman, Erica Leigh, Evaluating a Global Vector Autoregression for Forecasting (October 9, 2012). FRB International Finance Discussion Paper No. 1056, Available at SSRN: https://ssrn.com/abstract=2185545 or http://dx.doi.org/10.2139/ssrn.2185545

Neil R. Ericsson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3709 (Phone)
202-736-5638 (Fax)

Erica Leigh Reisman

Government of the United States of America - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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