Forecasting Economic Aggregates by Disaggregates

45 Pages Posted: 11 May 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: January 2006

Abstract

We explore whether forecasting an aggregate variable using information on its disaggregate components can improve the prediction mean squared error over first forecasting the disaggregates and then aggregating those forecasts, or, alternatively, over 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, factor models, forecast model selection, predictability and VAR

JEL Classification: C51, C53, E31

Suggested Citation

Hendry, David F. and Hubrich, Kirstin, Forecasting Economic Aggregates by Disaggregates (January 2006). CEPR Discussion Paper No. 5485. Available at SSRN: https://ssrn.com/abstract=900409

David F. Hendry (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
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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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