Forecasting the World Economy in the Short Term

Authors


  • The authors would like to thank Gerhard Rünstler for helpful comments and suggestions. Any remaining errors are the sole responsibility of the authors. Any views expressed represent those of the authors and not necessarily those of the European Central Bank or the Eurosystem. For Audrone Jakaitiene, the work was prepared during a secondment to the Directorate General Economics of the ECB.

Abstract

(1433) Audrone Jakaitiene and Stephane Dees

Forecasting the world economy is a difficult task given the complex interrelationships within and across countries. This paper proposes a number of approaches to forecast short-term changes in selected world economic variables and aims, first, at ranking various forecasting methods in terms of forecast accuracy and, second, at checking whether methods forecasting directly aggregate variables (direct approaches) outperform methods based on the aggregation of country-specific forecasts (bottom-up approaches). Overall, all methods perform better than a simple benchmark for short horizons (up to 3 months ahead). Among the forecasting approaches used, factor models appear to perform the best. Moreover, direct approaches outperform bottom-up ones for real variables, but not for prices. Finally, when country-specific forecasts are adjusted to match direct forecasts at the aggregate levels (top-down approaches), the forecast accuracy is neither improved nor deteriorated (i.e. top-down and bottom-up approaches are broadly equivalent in terms of country-specific forecast accuracy).

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