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. https://doi.org/10.1016/j.ijforecast.2014.06.006

TitleMacroeconomic information, structural change, and the prediction of fiscal aggregates
TypeJournal article
AuthorsCarriero, A.
Mumtaz, H.
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 version
Digital Object Identifier (DOI)https://doi.org/10.1016/j.ijforecast.2014.06.006
Publication dates
Published06 Feb 2015
LicenseCC BY 3.0

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