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1 Availabl onlin a ScincDirc Procdia Economics and Financ 8 ( 204 ) s Inrnaional Confrnc 'Economic Scinific Rsarch - Thorical, Empirical and Pracical Approachs', ESPERA 203 Th accuracy assssmn of macroconomic forcass basd on conomric modls for Romania Mihala Simionscu a * a Insiu for Economic Forcasing of h Romanian Acadmy, Buchars, 0507, Romania Absrac Th forcass accuracy valuaion bcam a consan proccupaion of spcialiss in forcasing, bcaus of h failur of prdicions ha causd h acual conomic crisis. Th objciv of his rsarch is o modl and prdic som conomic variabls corrsponding oo fw macroconomic blocks for Romanian conomy. Th forcas mhod is rprsnd by conomric modls. Morovr, h accuracy of hs prdicions is assssd, VARMA modls gnraing mor accura shor-run forcass for inflaion, ral GDP and inrs ra in Romania (horizon: ) compard o VAR and AR modls. Th conomric modls proposd for unmploymn ra, xchang ra and ra of monary supply drmind br forcass han random walk. 204 Th Auhors. Publishd by Elsvir B.V. Opn accss undr CC BY-NC-ND licns. Slcion and pr-rviw undr rsponsibiliy of of h Organizing Commi of of ESPERA 203. Kywords: conomric modl; VARMA modl; forcas; accuracy; naïv forcass;. Inroducion Th acual conomic crisis ha was xplaind only by argumns rlad o forcass uncrainy drmind a mor inrs in assssing prdicions accuracy. Acually, his valuaion is a mirror of h forcasing procss qualiy. Th conomric modl is on of h mos uilizd forcasing mhods. Thr is an imporan rlaionship * Corrsponding auhor. Tl.: ; fax: addrss: mihala_mb@yahoo.com Th Auhors. Publishd by Elsvir B.V. Opn accss undr CC BY-NC-ND licns. Slcion and pr-rviw undr rsponsibiliy of h Organizing Commi of ESPERA 203 doi: 0.06/S (4)0043-9

2 672 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) bwn h conomric modl and h prdicion basd on i. Acually, h accuracy assssmn hlps us in improving h conomric modl, bu also h forcasing procss islf. For xampl, an ovrsimad forcas is a clar ky ha our conomric modl did no considrd h shocks in h conomy. Th original conribuion of his rsarch is rlad o h proposal of som conomric modls for dscribing h voluion of som macroconomic indicaors in Romania, bu also for making prdicions. On h ohr hand, h assssmn of forcass accuracy was mad, som of h modls proving o gnra br prdicions han h naïv ons. 2. Liraur Th high forcass accuracy is an imporan objciv for many spcialiss in forcasing. Our objciv is o valua h accuracy in ordr o apply a suiabl sragy for growing h dgr of prdicions prformanc. In conomic crisis h accuracy dcrass, h ncssiy of assssing h accuracy growing. Th forcass accuracy is a vry larg domain of rsarch, an xhausiv prsnaion of i bing impossibl. Bu, som of h rcn rsuls will b dscribd. Brau (203) provd ha h filrs, bu also Hol Winrs procdur could b usd as sragis o g mor accura prdicions for inflaion ra in USA, whn h iniial xpcaion ar providd by SPF. Th Hol-Winrs mhod gav br rsuls. According o Brau (Simionscu) (202), h combind forcass ar a suiabl way of improving h unmploymn forcass in Romania. Th auhors Bianchi and Dschamps (202) concludd ha hr ar larg diffrncs bwn macroconomic forcass for China rgarding h accuracy masurs for consumpion and invsmn, GDP and inflaion. Allan (202), who usd quaniaiv and qualiaiv chniqus o assss h forcass accuracy, provd ha combind forcass ar a suiabl way o improv h OECD prdicions for GDP in G7 counris. Abru (20) valuad h prformanc of macroconomic forcass mad by Europan Commission, Inrnaional Monary Fund and Organizaion for Economic Coopraion and Dvlopmn and wo priva insiuions, which ar Th Economis and h Consnsus Economics. Th auhor analyzd h dircional accuracy and h abiliy of prdicing an vnual conomic crisis. In Nhrlands, xprs mad prdicions saring from h macroconomic modl usd by h h insiuion spcializd in policy analysis known as CPB. For h priod was rconsrucd h modl of h xprs macroconomic variabls voluion and i was compard wih h bas modl. Th conclusions of Franss al. (20) wr ha h CPB modl forcass ar in gnral biasd and wih a highr dgr of accuracy. Rv and Vigfusson (20) compard h prformanc of forcass basd on fuurs, choosing as a rfrnc modl h auorgrssiv modl of ordr on and h auorgrssiv modl of ordr on wih consan. Kuria (200) showd ha his prdicions basd on an auorgrssiv fracionally ingrad moving avrag modl of h unmploymn ra ouprformd h naïv prdicions in wha concrns h prformanc. In hir sudy, Shiu and Yaya (2009) valuad h prformanc of xchang ra forcass in England and USA, hir prdicions bing basd on ARIMA and ARFIMA modls. Th auhors rcommndd h us in prdicions of h ARFIMA modls in boh counris. Edg al. (2009) valuad h prformanc of forcass mad by Fdral Rsrv saff and of hos basd by a im-sris modl and a DSGE modl. Gorr (2009) rcommndd h us of classical accuracy masurs whn a normal voluion of h conomy is xpcd, whil h ROC curv is mor suiabl for crisis ims. Lam al. (2008) mad a comparison of xchang ra forcass dgr of prformanc, showing ha combind forcass ar br han h prdicions ha usd only on modl. Th auhors Hilmann and Sklr (2007) gav h following argumns for h lack of high accuracy for G7 macroconomic prdicions: unsuiabl forcasing mhods and unsuiabl xpcaions rgarding h dgr of prformanc. In h rsarch of Ms and Rogoff (983), h auhors provd ha random walk procss gnras br forcass han srucural modls.

3 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) Modlling and prdicing macroconomic indicaors in Romania Som conomric modls corrsponding o macro-conomic blocks ar dscribd, h daa rfrring o Romanian conomy. Ths conomric modls ar usd as forcas mhods. 3.. Economric modls for macroconomic variabls: inrs ra, ral GDP, inflaion ra A VARMA (vcor auorgrssiv moving avrag) modl is simad using h full informaion maximum liklihood (FIML) dscribd by Durbin (963). This mhod provids simas for paramrs and sandard rrors of h paramrs, including h consans. Th modl was xprssd in sa-spac form for which h mhods basd on Kalman filr ar usd for opimisaion. Th mhod, also usd by Maxoglou ș i Smih (2007), was applid in Malab and h following modl was obaind: y y , whr GDP _ r y inf laion _ r () in rs _ r Tabl. Th simaion of ARMA and VAR modls Variabls Inflaion Inrs ra ARMA modls Growh in Ral GDP Variabls Inflaion Inrs ra Growh in Ral GDP VAR modl 3.2. Modl for h growh in ral GDP Th daa rlad o ral growh of GDP ar providd by Eurosa for h priod ral GDP ra in yar compard o yar - (annual daa) W crad in EViws a im variabl of rnd yp (): gnr =@rnd(990). This im variabl aks h valu 0 for h yar 990, hn i grows succssivly in im wih on uni in ach yar compard o h prvious yar. W simad a linar rnd using h modl: Box-Jnkins procdur is usd o modl sparaly h rsiduals of h modls whr h rnd was pu in

4 674 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) vidnc. Th rsiduals daa sris corrsponding o A quaion is no saionary, bing ncssary h firs ordr diffrniaion. Th diffrniad daa sris is hn modlld using Box and Jnkins mhodology. Tabl 2. Economric modls usd o prdic h ra of ral GDP compard o h prvious yar (on-yar-ahad varian) Yar in h forcas horizon 20 (modl A) Economric modls 202 (modl B) 203 (modl C and D) = For diffrniad sris of h rsiduals AR(2) (auo-rgrssiv of ordr 2) modls wr obaind. Ths modls ar usd o prdic h rsiduals ha will b inroducd in h iniial quaions and h ral GDP ras will b compud in h nd. Tabl 3. Forcass for h ral GDP ra on h horizon Yar On-yar-ahad prdicions Forcass on 3 yars Th analysis of on-yar-ahad prdicions on h nir horizon pu ino vidnc h dcras of ral GDP ra. For 203, h scond modl drmind a lowr ra compard o modl C. If h sam modl ill h forcas origin is usd for making prdicions for 3 yars (20, 202 and 203), h anicipad ral GDP ra has a lowr dcras rhyhm han h prdicions mad wih on yar ahad Modl for unmploymn ra Th unmploymn ra (ur) is modlld using h dpndncis wih h indx of ral salary compard o 990 (, houshold saving ra (saving_r) and social prssur ra (r_prs), h xognous variabls bing in h prvious priod and covring h priod (2) Th following modl was simad wih boosrappd cofficins: (3) For h prdicion corrsponding o 203, h following modl was usd: (4) Tabl 4. Unmploymn ra (%) prdicions on h horizon Yar Forcas

5 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) Th highs valu of h unmploymn ra is anicipad for 202, bing followd by a dcras in 203, bu wih a valu highr han in 20 wih 0.72 prcnag poins Modl for mony supply Th ra of ral mony supply M3 is prdicd on h horizon using annual daa sris ( ) for variabls lik: ral GDP growh (994=00), inrs ral ra, indx of consumr prics. Th daa ar providd by World Bank. Th cofficins ar simad using boosrapping chniqu wih rplicaions. - ra of ral mony supply M3 - ral GDP growh - inrs ral ra - indx of consumr prics compard o h valu in 994 Tabl 5. Economric modls usd in forcasing wih a yar ahad h ra of ral mony supply Yar 20 Economric modl usd in making h prdicion for ha yar Th conomric modls pu in vidnc a ngaiv corrlaion bwn ra of ral mony supply and h logarihm of GDP and a posiiv corrlaion of h indicaor wih logarihm of diffrncd indx of prics, rspcivly doubl diffrncd inrs ra. On shor-run h mony supply should b posiivly corrlad wih GDP. In his cas, h conomic agns anicipa h inflaion bfor h incras in mony supply. Tabl 6. Forcass for ra of ral mony supply (%) wih a yar ahad on h horizon Yar On-yar-ahad prdicion Rgisrd valu For 202 an incras in h mony supply was anicipad, bu i was no nough larg. For 203, a dcras in h mony supply is prdicd. 4. Th assssmn of forcass accuracy W proposd a nw comparison masur of accuracy for prdicions basd on VARMA modl: GFESM (gnralizd forcas rror of scond momn) raio rlaiv o VARMA modl. This masur is invarian o opraions wih h sam variabls, bu also wih diffrn variabls.

6 676 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) T GFESM E h h - n-dimnsional forcas rror on h horizon h h (5) W compud h raios bwn GFESM (on quarr bfor) for ach wo modls (h=). For mulivaria modls GFESM is also sparaly compud. Tabl 7. GFESM raio rlaiv o VARMA modl for on-sp-ahad forcass Modl Ral GDP ra ri inf laion r in rs GFESM VAR (AIC),06*,2**,33*,4 ARMA 0,98,05,8* - Modl naiv 0,93,55*,37* - * For a significanc lvl of 5% h raio is diffrn from ** For a significanc lvl of 0% h raio is diffrn from Th VARMA modl proposd for Romania providd mor accura forcass han VAR modls for all variabls. For inflaion and inrs ra hs forcass ar br han h naiv on. Tabl 8. Ex-an accuracy masurs for forcass in 203 of GDP ra, unmploymn ra and ra of mony supply Accuracy indicaor Ra of ral GDP forcas basd on: Modl A Modl C Modl D Unmploymn ra Error Absolu rror Prcnag rror U Thil s cofficin Ra of monary supply All h forcass valuaion for 203 is mad undr h assumpion of kping h sam valu rgisrd in 202. Only h GDP forcas basd on modl A is ovrsimad, indicaing a valu grar wih 82.63% han h naiv on. Th D modl gnrad h lss accura GDP ra forcas. Th rror of unmploymn ra forcas will b around 3.6% of h prdicd valu in 202. Th anicipad accuracy for unmploymn rar in 203 is rahr high, grar han h on rgisrd in 202. Th forcas rror of h ra of monary supply will incras wih 20.53% in 203 compard o h ffciv valu in 202.

7 Mihala Simionscu / Procdia Economics and Financ 8 ( 204 ) Tabl 9. Accuracy indicaors for unmploymn ra and ra of monary supply forcass (horizon: ) Accuracy indicaor Unmploymn ra Ra of monary supply ME MAE RMSE U U For unmploymn ra xpcaions was obsrvd a consan ovrsimaion for , h naiv forcass ouprforming hm. For h ra of monary supply h prdicions ar br han h naiv ons, U saisic having an xrmly low valu (0.04). Th monary supply undrsimaion is prsisn, MAE and ME having h sam valu. Conclusions Th forcass accuracy assssmn should follow any macroconomic forcas. Th conomric modls proposd in his papr gnrad in mos of h cass ovrsimad forcass. This is an imporan ky for h rsarchr. Our conomric modls did no considrd h shocks ha appard in h Romanian conomy. Th forcass basd on VARMA modl wr suprior in rms of accuracy o hos basd on VAR or AR() modls. Th naiv forcass providd for GDP ra mor accura apprciaions. Only for unmploymn ra and ra of mony supply our conomric modls wr br han hos basd on random walk. Rfrncs Abru, I., 20. Inrnaional organizaions vs. priva analyss forcass: an valuaion, Bank of Porugal Rviw 34, p Allan, G., 202. Evaluaing h usfulnss of forcass of rlaiv growh, Economics Discussion 2, p. 0. Bianchi, P., Dschamps, B., 202. An valuaion of Chins macroconomic forcass, Journal of Chins Economics and Businss Sudis 0, p Brau, M., 202. Sragis o Improv h Accuracy of Macroconomic Forcass in Unid Sas of Amrica, (Ed.). Lap Lambr, Munich, p. 55. Brau (Simionscu), M., 202. Som mpirical sragis for improving h accuracy of unmploymn ra forcass in Romania, Annals of Spiru Har Univrsiy, Economic Sris, Issu 4, Dcmbr 202 Durbin, J., 963. Maximum-Liklihood Esimaion of h Paramrs of a Sysm of Simulanous Rgrssion Equaions, unpublishd manuscrip, p. 5. Edg. R., Kily M., Lafor J., A comparison of forcas prformanc bwn Fdral Rsrv Saff Forcass simpl rducd-form modls and a DSGE modl, Financ and Economics Discussion Sris 2, p. 32. Franss, P.H., Kranndonk, H., Lansr, D., 20. On Modl and Various Exprs: Evaluaing Duch Macroconomic Forcass, Inrnaional Journal of Forcasing 28, p Gorr, W. L., Forcas accuracy masurs for xcpion rporing using rcivr opraing characrisic curvs. Inrnaional Journal of Forcasing 25, p Hilmann, U., Sklr, H., Inroducion o Th fuur of macroconomic forcasing, Inrnaional Journal of Forcasing, 23(2), p Lam, L., Fung, L., Yu, I., Comparing forcas prformanc of xchang ra modls, Hong Kong Monary Auhoriy, Working Papr 8, p. 56. Kuria, T., 200. A forcasing modl for Japan s unmploymn ra, Eurasian Journal of Businss and Economics 3(5), p Ms, R., Rogoff K., 983. Empirical Exchang Ra Modls of h Svnis. Journal of Inrnaional Economics, 4, p Maxoglou, K., Smih, A., Maximum liklihood simaion of VARMA modls using a sa-spac form-em algorihm, Journal of Tim Sris Analysis 28, p. 5. Rv, T.A., Vigfusson, R.J., 20. Evaluaing h forcasing prformanc of commodiy fuur prics, Board of Govrnors Sysm, Inrnaional Financ Discussion Paprs 025, p. 45. Shiu O.I.,Yaya O.S. (2009), Masuring forcas prformanc of ARMA & ARFIMA modls: An applicaion o US Dollar/UK pound forign xchang ra, Europan Journal of Scinific Rsarch 32, p