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An historical perspective on the forecasting performance of the Treasury Model: forecasting the growth in UK consumers’ expenditure

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Abstract:

Drawing upon Treasury Official Economic Forecasts Vols. I & II, a series of Treasury Model (TM) forecasts of the percentage growth in real total consumers’ expenditure are derived for the period 1967 to 1989. The one-, two- and three-step ahead forecasts examined cover an interesting period which includes major shocks to the UK economy, business cycle effects and changes in economic policy. Whilst a battery of forecast evaluation statistics and tests do not detect any evidence of forecast bias or irrationality over the whole sample, split-sample analysis provides evidence of a switch from overprediction to underprediction around 1977. In addition, the application of ‘modified’ versions of Holden–Peel (1990) tests provides evidence of the longest horizon forecasts failing to capture the full movement of changes in consumption growth. Using simple regression and a selection of forecast encompassing tests, shorter horizon forecasts are found to dominate longer horizon forecasts, a feature which might be expected logically, but need not occur in practice. Finally, forecast performance is related to changes in model specification and modelling methodology.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2010.510465

Affiliations: Department of Economics,University of Wales Swansea, Swansea SA2 8PP, UK

Publication date: February 1, 2012

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