Economic Forecasting Techniques Flashcards
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Read the first 7 Economic Forecasting Techniques flashcards as text
In a Vector Autoregression (VAR) model, lag length selection is critical. Which information criterion penalizes additional parameters most heavily, often selecting the most parsimonious model?
Answer: Bayesian Information Criterion (BIC)
The BIC (Schwarz criterion) applies the strongest penalty for additional parameters, consistently selecting shorter lag lengths than AIC in large samples.
Which scenario best illustrates the 'Lucas critique' in economic forecasting?
Answer: Policy changes alter agent behavior, invalidating forecasts based on historical relationships
Robert Lucas argued that structural parameters estimated from historical data change when policy regimes shift, rendering reduced-form forecasts unreliable.
A fan chart in economic forecasting is used to:
Answer: Communicate forecast uncertainty through probability bands around a central forecast
Fan charts show widening probability intervals (e.g., 50%, 75%, 90% confidence bands) to convey that uncertainty grows with the forecast horizon.
The Diebold-Mariano test is used to:
Answer: Compare the predictive accuracy of two competing forecasting models
The Diebold-Mariano test assesses whether differences in forecast accuracy between two models are statistically significant using a loss differential statistic.
Regime-switching models, such as Hamilton's Markov-switching model, are particularly useful for economic forecasting because they:
Answer: Allow model parameters to change discretely across unobserved states (e.g., recession vs. expansion)
Markov-switching models capture nonlinearities by allowing parameters to shift probabilistically across latent states, improving recession and expansion forecasting.
Which of the following is an example of a leading economic indicator used in composite index forecasting?
Answer: Manufacturing new orders (leading)
Manufacturing new orders tend to rise before actual production increases, making them a leading indicator included in the Conference Board's LEI.
When a forecaster reports a 95% prediction interval, it means:
Answer: There is a 95% probability the actual value falls within the interval under the assumed model
A 95% prediction interval is constructed so that, if the model is correctly specified, 95% of future realizations will fall within the stated bounds.