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Forecasting in cointegrated systems
Author(s) -
Clements Michael P.,
Hendry David F.
Publication year - 1995
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950100204
Subject(s) - bivariate analysis , cointegration , econometrics , monte carlo method , unit root , sample (material) , representation (politics) , mathematics , forecast error , statistics , chemistry , chromatography , politics , political science , law
We consider the implications for forecast accuracy of imposing unit roots and cointegrating restrictions in linear systems of I (1) variables in levels, differences, and cointegrated combinations. Asymptotic formulae are obtained for multi‐step forecast error variances for each representation. Alternative measures of forecast accuracy are discussed. Finite sample behaviour in a bivariate model is studied by Monte Carlo using control variables. We also analyse the interaction between unit roots and cointegrating restrictions and intercepts in the DGP. Some of the issues are illustrated with an empirical example of forecasting the demand for M1 in the UK.