BBVA‐ARIES: a forecasting and simulation model for EMU

Abstract

This paper describes the BBVA-ARIES, a Bayesian vector autoregression (BVAR) for the European Economic and Monetary Union (EMU). In addition to providing EMU-wide growth and inflation forecasts, the model provides an assessment of the interactions between key EMU macroeconomic variables and external ones, such as world GDP or commodity prices. A comparison of the forecasts generated by the model and those of private analysts and public institutions reveals a very positive balance in favour of the model. For their part, the simulations allow us to assess the potential macroeconomic effects of macroeconomic developments in the EMU. Copyright © 2003 John Wiley & Sons, Ltd.

Predicting real growth and the probability of recession in the Euro area using the yield spread

“…A notable feature of most empirical works is that the term spread-output growth relation has been modelled using a linear framework and little attention has been given to the possibility of asymmetric effects and time varying parameters. Indeed, as some recent studies have shown, based on data for the US and Canada, the term spread-output relation might not be linear and its predictive content might also have asymmetric effects, as measured in terms of a threshold on the conditional expectation of output growth (Galbraith and Tkacz, 2000) 6 . In line with these arguments, Venetis et al (2003) study the predictive power and stability of the spread-output relationship with data from the US, UK and Canada using non-linear autoregression models that can accommodate regime switching type non-linear behavior and situations of time varying parameters.…”

“…Further details on database can be found inBallabriga and Castillo (2003) 24. For a detailed explanation on the advantages of PPP based GDP measures see Gulde and Shulze-Ghattas (1992) 25.…”

To Aggregate or Not to Aggregate? Euro Area Inflation Forecasting

“…The use of BVAR models may help to tackle the problem of over-parameterisation which is particularly relevant in small samples (see Doan et al (1984)) and have been successfully employed to forecast inflation in the euro area and in the euro area countries (see for example Bikker (1998Bikker ( , 1999, Ballabriga and Castillo (2000) and Canova (2002)). For an interesting literature overview on BVAR see Ciccarelli and Rebucci (2003).…”

“…Within the class of multivariate models, the following are considered: vector autoregressive models (VAR), Bayesian VAR models (BVAR) and single equation models. BVAR models are tested given the stream of literature reporting on their usefulness for forecasting inflation in the euro area and in the euro area countries (see Artis and Zhang (1990), Ballabriga and Castillo (2000), Bikker (1998) and Canova (2002)). Moreover, BVAR models may help to tackle the problem of over-parameterisation, which is particularly relevant in small samples (see Doan et al (1984)).…”

A Small Forward-Looking Macroeconomic Model for EMU

“…We have applied the Hodrick-Prescott filter to quarterly EMU real GDP from 1970(1) to 2002(4) using the predictions provided by the BBVA-Aries BVAR model. More details about the aggregation of national GDPs and the other variables used in this paper (almost identical to those inFagan, Henry and Mestre, 2000) can be found inBallabriga and Castillo (2000).…”