VAR, ERROR CORRECTION AND PRETEST FORECASTS AT LONG HORIZONS

Abstract

This paper focuses on the construction of forecasts over long horizons where a typical long‐horizon forecast might span four years using 20 to 40 years’ data. It is argued that the presence of persistence in the form of unit or near‐unit autoregressive roots poses substantial difficulties for long‐horizon interval and point forecasting. These difficulties may not be overcome even by efficient pre‐testing or model‐selection procedures and might, in general, lead to point forecasts with large asymptotic root mean squared errors and undesirably wide prediction intervals.

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