Evaluating Direct Multistep Forecasts |
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| Authors: | Todd E Clark Michael W McCracken |
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| Institution: | 1. Economic Research Department , Federal Reserve Bank of Kansas City , Kansas City, Missouri, USA todd.e.clark@kc.frb.org;3. Division of Research and Statistics , Board of Governors of the Federal Reserve System , Washington, D.C., USA |
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| Abstract: | ABSTRACT This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy and encompassing applied to direct, multistep predictions from nested regression models. We first derive asymptotic distributions; these nonstandard distributions depend on the parameters of the data-generating process. We then use Monte Carlo simulations to examine finite-sample size and power. Our asymptotic approximation yields good size and power properties for some, but not all, of the tests; a bootstrap works reasonably well for all tests. The paper concludes with a reexamination of the predictive content of capacity utilization for inflation. |
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| Keywords: | Causality Long horizon Prediction |
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