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Keywords:

  • forecasting;
  • unobserved components;
  • time-series modelling

ABSTRACT

Using a structural time-series model, the forecasting accuracy of a wide range of macroeconomic variables is investigated. Specifically of importance is whether the Henderson moving-average procedure distorts the underlying time-series properties of the data for forecasting purposes. Given the weight of attention in the literature to the seasonal adjustment process used by various statistical agencies, this study hopes to address the dearth of literature on ‘trending’ procedures. Forecasts using both the trended and untrended series are generated. The forecasts are then made comparable by ‘detrending’ the trended forecasts, and comparing both series to the realised values. Forecasting accuracy is measured by a suite of common methods, and a test of significance of difference is applied to the respective root mean square errors. It is found that the Henderson procedure does not lead to deterioration in forecasting accuracy in Australian macroeconomic variables on most occasions, though the conclusions are very different between the one-step-ahead and multi-step-ahead forecasts. Copyright © 2011 John Wiley & Sons, Ltd.