Measuring Predictability: Theory and Macroeconomic Applications

51 Pages Posted: 24 Jul 2000 Last revised: 3 Aug 2010

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 1997

Abstract

We propose a measure of predictability based on the ratio of the expected loss of a short-run forecast to the expected loss of a long-run forecast. This predictability measure can be tailored to the forecast horizons of interest, and it allows for general loss functions, univariate or multivariate information sets, and stationary or nonstationary data. We propose a simple estimator, and we suggest resampling methods for inference. We then provide several macroeconomic applications. First, based on fitted parametric models, we assess the predictability of a variety of macroeconomic series. Second, we analyze the internal propagation mechanism of a standard dynamic macroeconomic model by comparing predictability of model inputs and model outputs. Third, we use predictability as a metric for assessing the similarity of data simulated from the model and actual data. Finally, we sketch several promising directions for future research.

Suggested Citation

Diebold, Francis X. and Kilian, Lutz, Measuring Predictability: Theory and Macroeconomic Applications (August 1997). NBER Working Paper No. t0213. Available at SSRN: https://ssrn.com/abstract=226621

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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