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Modelling and Forecasting Fiscal Variables for the euro Area

Carlo Favero () and Massimiliano Marcellino

No 5294, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we assess the possibility of producing unbiased forecasts for fiscal variables in the euro area by comparing a set of procedures that rely on different information sets and econometric techniques. In particular, we consider ARMA models, VARs, small scale semi-structural models at the national and euro area level, institutional forecasts (OECD), and pooling. Our small scale models are characterized by the joint modelling of fiscal and monetary policy using simple rules, combined with equations for the evolution of all the relevant fundamentals for the Maastricht Treaty and the Stability and Growth Pact. We rank models on the basis of their forecasting performance using the mean square and mean absolute error criteria at different horizons. Overall, simple time series methods and pooling work well and are able to deliver unbiased forecasts, or slightly upward biased forecast for the debt-GDP dynamics. This result is mostly due to the short sample available, the robustness of simple methods to structural breaks, and to the difficulty of modelling the joint behaviour of several variables in a period of substantial institutional and economic changes. A bootstrap experiment highlights that, even when the data are generated using the estimated small scale multi country model, simple time series models can produce more accurate forecasts, due to their parsimonious specification.

Keywords: Fiscal forecasting; Forecast comparison; Fiscal rules; Euro area (search for similar items in EconPapers)
JEL-codes: C30 C53 E62 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-ecm, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Journal Article: Modelling and Forecasting Fiscal Variables for the Euro Area* (2005) Downloads
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