Forecasting Economic Aggregates by Disaggregates

53 Pages Posted: 21 Mar 2006

See all articles by David F. Hendry

David F. Hendry

University of Oxford - Department of Economics

Kirstin Hubrich

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

We suggest an alternative use of disaggregate information to forecast the aggregate variable of interest, that is to include disaggregate information or disaggregate variables in the aggregate model as opposed to first forecasting the disaggregate variables separately and then aggregating those forecasts or, alternatively, using only lagged aggregate information in forecasting the aggregate. We show theoretically that the first method of forecasting the aggregate should outperform the alternative methods in population. We investigate whether this theoretical prediction can explain our empirical findings and analyse why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of euro area and US inflation in some situations, but not in others.

Keywords: Disaggregate information, predictability, forecast model selection, VAR, factor models

JEL Classification: C51, C53, E31

Suggested Citation

Hendry, David F. and Hubrich, Kirstin, Forecasting Economic Aggregates by Disaggregates (February 2006). ECB Working Paper No. 589. Available at SSRN: https://ssrn.com/abstract=882790

David F. Hendry (Contact Author)

University of Oxford - Department of Economics ( email )

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Oxford, OX1 3BJ
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+44 1865 278544 (Phone)
+44 1865 278557 (Fax)

Kirstin Hubrich

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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