Macroeconomic information, structural change, and the prediction of fiscal aggregates

Carriero, A., Mumtaz, H. and Theophilopoulou, A. 2015. Macroeconomic information, structural change, and the prediction of fiscal aggregates. International Journal of Forecasting. 31 (2), p. 325–348. doi:10.1016/j.ijforecast.2014.06.006

TitleMacroeconomic information, structural change, and the prediction of fiscal aggregates
AuthorsCarriero, A., Mumtaz, H. and Theophilopoulou, A.
Abstract

Previous research on the prediction of fiscal aggregates has shown evidence that simple autoregressive models often provide better forecasts of fiscal variables than multivariate specifications. We argue that the multivariate models considered by previous studies are small-scale, probably burdened by overparameterization, and not robust to structural changes. Bayesian Vector Autoregressions (BVARs), on the other hand, allow the information contained in a large data set to be summarized efficiently, and can also allow for time variation in both the coefficients and the volatilities. In this paper we explore the performance of BVARs with constant and drifting coefficients for forecasting key fiscal variables such as government revenues, expenditures, and interest payments on the outstanding debt. We focus on both point and density forecasting, as assessments of a country’s fiscal stability and overall credit risk should typically be based on the specification of a whole probability distribution for the future state of the economy. Using data from the US and the largest European countries, we show that both the adoption of a large system and the introduction of time variation help in forecasting, with the former playing a relatively more important role in point forecasting, and the latter being more important for density forecasting.

KeywordsBayesian VARs; Forecasting; Fiscal policy
JournalInternational Journal of Forecasting
Journal citation31 (2), p. 325–348
ISSN0169-2070
Year2015
PublisherElsevier
Publisher's versionforecasting_final.pdf
Digital Object Identifier (DOI)doi:10.1016/j.ijforecast.2014.06.006
Publication dates
Published06 Feb 2015
LicenseCC BY 3.0

Related outputs

The Impact of Monetary Policy on Inequality in the UK. An Empirical Analysis
Mumtaz, H. and Theophilopoulou, A. 2017. The Impact of Monetary Policy on Inequality in the UK. An Empirical Analysis. European Economic Review. 98, pp. 410-423. doi:10.1016/j.euroecorev.2017.07.008

The Impact of Uncertainty Shocks under Measurement Error: A Proxy SVAR approach
Carriero, A., Harron Mumtaz, Theodoridis, K., Theophilopoulou, A. and Mumtaz, H. 2015. The Impact of Uncertainty Shocks under Measurement Error: A Proxy SVAR approach. Journal of Money, Credit and Banking. 47 (6), p. 1223–1238. doi:10.1111/jmcb.12243

The transmission of international shocks to the UK. Estimates based on a time-varying Factor Augmented VAR
Liu, P., Mumtaz, H. and Theophilopoulou, A. 2014. The transmission of international shocks to the UK. Estimates based on a time-varying Factor Augmented VAR. Journal of International Money and Finance. 46, pp. 1-15. doi:10.1016/j.jimonfin.2014.03.004

The effect of labour earnings on post retirement income
Adami, R., Gough, O. and Theophilopoulou, A. 2013. The effect of labour earnings on post retirement income. Journal of Economic Studies. 40 (3), pp. 284-297. doi:10.1108/01443581311283925

International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy
Liu, P., Mumtaz, H. and Theophilopoulou, A. 2011. International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy. Bank of England Working Paper No. 425. doi:10.2139/ssrn.1854325

The impact of structural pension reforms on the macroeconomic performance: an empirical analysis
Theophilopoulou, A. 2008. The impact of structural pension reforms on the macroeconomic performance: an empirical analysis. Birkbeck Working Papers in Economics & Finance. 0806.

Population ageing and public pension reforms in a small open economy
Nickel, C., Rother, P. and Theophilopoulou, A. 2008. Population ageing and public pension reforms in a small open economy. European Central Bank, Working Paper Series. 863.

Permalink - https://westminsterresearch.westminster.ac.uk/item/9w79y/macroeconomic-information-structural-change-and-the-prediction-of-fiscal-aggregates


Share this
Tweet
Email