A vector error correction forecasting model of the U.S. economy

Anderson, Richard G.; Hoffman, Dennis L.; Rasche, Robert H.

Working Paper

A vector error correction forecasting model of the U.S. economy

Abstract: Any research or policy analysis in economics must be consistent with the time-series properties of observed macroeconomic data. Numerous previous studies of such time series reinforce the need to specify correctly a model's multivariate stochastic structure. This paper discusses in detail the speciation of a vector error correction forecasting model that is anchored by long-run equilibrium relationships suggested by economic theory. The model includes six variables - the CPI, the implicit price deflator for GDP, real money balances (MI), the federal funds rate, the yield on long-term (10-year) government bonds, and real GDP - and four cointegrating vectors. Model forecasts during the 1990's are compared to those made by the Federal Reserve and by private forecasters.

Keywords: Forecasting; Econometric models;

Status: Published in Journal of Macroeconomics, December 2002, 24(4), pp. 569-98