A Similarity-Based Approach for Macroeconomic Forecasting

33 Pages Posted: 25 Mar 2020

See all articles by Yiannis Dendramis

Yiannis Dendramis

University of Cyprus - Department of Accounting and Finance

George Kapetanios

King's College, London

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: March 2020

Abstract

In the aftermath of the recent financial crisis there has been considerable focus on methods for predicting macroeconomic variables when their behavior is subject to abrupt changes, associated for example with crisis periods. In this paper we propose similarity based approaches as a way to handle parameter instability, and apply them to macroeconomic forecasting. The rationale is that clusters of past data that match the current economic conditions can be more informative for forecasting than the entire past behavior of the variable of interest. We apply our methods to predict both simulated data in a set of Monte Carlo experiments, and a broad set of key US macroeconomic indicators. The forecast evaluation exercises indicate that similarity-based approaches perform well, in general, in comparison with other common time-varying forecasting methods, and particularly well during crisis episodes.

Keywords: empirical similarity, Forecast comparison, Kernel estimation, Macroeconomic forecasting, parameter time variation

Suggested Citation

Dendramis, Yiannis and Kapetanios, George and Marcellino, Massimiliano, A Similarity-Based Approach for Macroeconomic Forecasting (March 2020). CEPR Discussion Paper No. DP14469, Available at SSRN: https://ssrn.com/abstract=3560276

Yiannis Dendramis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

75 Kallipoleos Street
Nicosia CY 1678, Nicosia P.O. Box 2
Cyprus

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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