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Revisiting useful approaches to data-rich macroeconomic forecasting
Kapetanios, George; Groen, Jan J. J. (2008)
This paper analyzes the properties of a number of data-rich methods that are widely used in macroeconomic forecasting, in particular principal components (PC) and Bayesian regressions, as well as a lesser-known alternative, partial least squares (PLS) regression. In the latter method, linear, orthogonal combinations of a large number of predictor variables are constructed such that the covariance between a target variable and these common components is maximized. Existing studies have focused on modelling the target variable as a function of a finite set of unobserved common factors that ...
Staff Reports , Paper 327

Working Paper
Variation in the Phillips Curve Relation across Three Phases of the Business Cycle
Verbrugge, Randal; Ashley, Richard (2019-05-03)
We use recently developed econometric tools to demonstrate that the Phillips curve unemployment rate?inflation rate relationship varies in an economically meaningful way across three phases of the business cycle. The first (?bust phase?) relationship is the one highlighted by Stock and Watson (2010): A sharp reduction in inflation occurs as the unemployment rate is rising rapidly. The second (?recovery phase?) relationship occurs as the unemployment rate subsequently begins to fall; during this phase, inflation is unrelated to any conventional unemployment gap. The final (?overheating phase?) ...
Working Papers , Paper 19-09

Working Paper
Economic Activity by Race
Mboup, Fatima (2023-08-09)
We observe empirical differences between races across various macroeconomic variables for the White, Black, Asian, and Hispanic populations in the U.S. For instance, the Black unemployment rate in the U.S. is more often than not double the White unemployment rate. In this paper, I treat nine macroeconomic variables as noisy indicators of economic activity and estimate an index that measures the economic activity of racial demographic groups in the U.S., called Economic Activity by Race (EAR). The noise of the indicators motivates the use of Kalman filter estimation to extract a common ...
Working Papers , Paper 23-16

Working Paper
The Contribution of Jump Signs and Activity to Forecasting Stock Price Volatility
Murphy, Anthony; Hizmeri, Rodrigo; Tsionas, Mike G.; Izzeldin, Marwan (2019-03-28)
We document the forecasting gains achieved by incorporating measures of signed, finite and infinite jumps in forecasting the volatility of equity prices, using high-frequency data from 2000 to 2016. We consider the SPY and 20 stocks that vary by sector, volume and degree of jump activity. We use extended HAR-RV models, and consider different frequencies (5, 60 and 300 seconds), forecast horizons (1, 5, 22 and 66 days) and the use of standard and robust-to-noise volatility and threshold bipower variation measures. Incorporating signed finite and infinite jumps generates significantly better ...
Working Papers , Paper 1902

Working Paper
Variable Selection in High Dimensional Linear Regressions with Parameter Instability
Chudik, Alexander; Sharifvaghefi, Mahrad; Pesaran, M. Hashem (2024-08-05)
This paper considers the problem of variable selection allowing for parameter instability. It distinguishes between signal and pseudo-signal variables that are correlated with the target variable, and noise variables that are not, and investigates the asymptotic properties of the One Covariate at a Time Multiple Testing (OCMT) method proposed by Chudik et al. (2018) under parameter insatiability. It is established that OCMT continues to asymptotically select an approximating model that includes all the signals and none of the noise variables. Properties of post selection regressions are also ...
Globalization Institute Working Papers , Paper 394

Working Paper
Real-Time Forecasting and Scenario Analysis using a Large Mixed-Frequency Bayesian VAR
Owyang, Michael T.; McCracken, Michael W.; Sekhposyan, Tatevik (2020-04-10)
We use a mixed-frequency vector autoregression to obtain intraquarter point and density forecasts as new, high frequency information becomes available. This model, delineated in Ghysels (2016), is specified at the lowest sampling frequency; high frequency observations are treated as different economic series occurring at the low frequency. As this type of data stacking results in a high-dimensional system, we rely on Bayesian shrinkage to mitigate parameter proliferation. We obtain high-frequency updates to forecasts by treating new data releases as conditioning information. The same ...
Working Papers , Paper 2015-030

Working Paper
Significance Bands for Local Projections
Inoue, Atsushi; Jordà, Òscar; Kuersteiner, Guido M. (2023-05-31)
An impulse response function describes the dynamic evolution of an outcome variable following a stimulus or treatment. A common hypothesis of interest is whether the treatment affects the outcome. We show that this hypothesis is best assessed using significance bands rather than relying on commonly displayed confidence bands. Under the null hypothesis, we show that significance bands are trivial to construct with standard statistical software using the LM principle, and should be reported as a matter of routine when displaying impulse responses graphically.
Working Paper Series , Paper 2023-15

Journal Article
Comparing Measures of Potential Output
Owyang, Michael T.; Guisinger, Amy Y.; Shell, Hannah (2018)
One of the goals of stabilization policy is to reduce the output gap?the difference between potential and actual output?during downturns. Potential output, however, is an unobserved variable whose definition can vary. For example, some view potential output as the level of output that can be produced when employment is at the natural rate. Others use trend measures of output to measure potential. We survey some of these measures using both full-sample data (all of the data that would be available through June 2017) and real-time data (the actual data that would have been available at ...
Review , Volume 100 , Issue 4 , Pages 297-316

Working Paper
Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices
Martinez-Garcia, Enrique; Grossman, Valerie; Pavlidis, Efthymios (2017-08-01)
The recently developed SADF and GSADF unit root tests of Phillips et al. (2011) and Phillips et al. (2015) have become popular in the literature for detecting exuberance in asset prices. In this paper, we examine through simulation experiments the effect of cross-sectional aggregation on the power properties of these tests. The simulation design considered is based on actual housing data for both U.S. metropolitan and international housing markets and thus allows us to draw conclusions for different levels of aggregation. Our findings suggest that aggregation lowers the power of both the SADF ...
Globalization Institute Working Papers , Paper 325

Working Paper
An Alternative Measure of Core Inflation: The Trimmed Persistence PCE Price Index
O'Trakoun, John (2023-11)
I introduce the "trimmed persistence PCE," a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence personal consumption expenditures (PCE) display less tendency to mechanically pass-through the level of the prior period's inflation to the current period; thus, the impact of the current stance of monetary policy and real economic factors are more likely to be visible in recent trimmed persistence inflation compared to headline inflation. Trimmed persistence inflation performs ...
Working Paper , Paper 23-10

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