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Log versus level in VAR forecasting: 42 million empirical answers—Expect the unexpected

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  • Mayr, Johannes
  • Ulbricht, Dirk

Abstract

The use of log-transformed data has become standard in macroeconomic forecasting with VAR models. However, its appropriateness in the context of out-of-sample forecasts has not yet been exposed to a thorough empirical investigation. With the aim of filling this void, a broad sample of VAR models is employed in a multi-country set up and approximately 42 million pseudo-out-of-sample forecasts of GDP are evaluated. The results show that, on average, the knee-jerk transformation of the data is at best harmless.

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  • Mayr, Johannes & Ulbricht, Dirk, 2015. "Log versus level in VAR forecasting: 42 million empirical answers—Expect the unexpected," Economics Letters, Elsevier, vol. 126(C), pages 40-42.
    • Handle: RePEc:eee:ecolet:v:126:y:2015:i:c:p:40-42
    DOI: 10.1016/j.econlet.2014.11.008
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    1. Helmut Lütkepohl & Fang Xu, 2012. "The role of the log transformation in forecasting economic variables," Empirical Economics, Springer, vol. 42(3), pages 619-638, June.
    2. Bårdsen, Gunnar & Lütkepohl, Helmut, 2011. "Forecasting levels of log variables in vector autoregressions," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1108-1115, October.
    3. Luetkepohl Helmut & Xu Fang, 2011. "Forecasting Annual Inflation with Seasonal Monthly Data: Using Levels versus Logs of the Underlying Price Index," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-23, February.
    4. Arino, Miguel A. & Franses, Philip Hans, 2000. "Forecasting the levels of vector autoregressive log-transformed time series," International Journal of Forecasting, Elsevier, vol. 16(1), pages 111-116.
    5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    6. Proietti, Tommaso & Lütkepohl, Helmut, 2013. "Does the Box–Cox transformation help in forecasting macroeconomic time series?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 88-99.
    7. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
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    Cited by:

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    3. Gloria Gonzalez-Rivera & Yun Luo & Esther Ruiz, 2018. "Prediction Regions for Interval-valued Time Series," Working Papers 201817, University of California at Riverside, Department of Economics.
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    5. Serfraz, Ayesha, 2022. "Relationship between foreign direct investment inflows and Covid-19 pandemic in Pakistan: A monthly co-integration analysis," ZÖSS-Discussion Papers 97, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).

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    More about this item

    Keywords

    VAR-forecasting; Logarithmic transformation; Out-of-sample experiment;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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