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Log versus Level in VAR Forecasting: 42 Million Empirical Answers - Expect the Unexpected

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  • Johannes Mayr
  • Dirk Ulbricht

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 Mio. 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.

Suggested Citation

  • Johannes Mayr & Dirk Ulbricht, 2014. "Log versus Level in VAR Forecasting: 42 Million Empirical Answers - Expect the Unexpected," Discussion Papers of DIW Berlin 1412, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1412
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    References listed on IDEAS

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    1. 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.
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    4. 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.
    5. 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.
    6. 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.
    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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    More about this item

    Keywords

    VAR-forecasting; Logarithmic transformation;

    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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