RDP 2008-04: A Small BVAR-DSGE Model for Forecasting the Australian Economy Appendix E: Varying Lag Length

Andrew Hodge, Tim Robinson and Robyn Stuart

September 2008

Table E1 shows the impact of varying the lag length and λ on the forecast performance.

Table E1: RMSE of BVAR-DSGE over Different Lags and Values of λ
2002:Q1–2007:Q4, percentage points
λ One quarter ahead Four quarters ahead Eight quarters ahead
Quarterly Year-ended Year-ended
Lag 2 Lag 3 Lag 4 Lag 2 Lag 3 Lag 4 Lag 2 Lag 3 Lag 4
Output
0.75 0.364 0.338 0.389 0.753 0.629 0.759 0.811 0.742 0.758
1 0.358 0.333 0.373 0.739 0.622 0.730 0.822 0.756 0.759
1.25 0.354 0.329 0.362 0.729 0.618 0.710 0.835 0.766 0.765
1.5 0.352 0.326 0.353 0.714 0.614 0.690 0.847 0.796 0.771
1.75 0.348 0.326 0.347 0.700 0.613 0.676 0.841 0.789 0.780
2 0.347 0.324 0.342 0.688 0.609 0.663 0.840 0.801 0.789
5 0.356 0.337 0.340 0.627 0.588 0.589 0.798 0.812 0.829
10 0.365 0.354 0.346 0.631 0.607 0.598 0.792 0.779 0.789
Interest rates
0.75 0.167 0.201 0.208 0.545 0.709 0.786 0.575 0.713 0.784
1 0.166 0.197 0.204 0.514 0.665 0.741 0.552 0.687 0.757
1.25 0.166 0.195 0.200 0.491 0.631 0.706 0.532 0.662 0.731
1.5 0.167 0.196 0.200 0.477 0.585 0.677 0.523 0.624 0.709
1.75 0.170 0.196 0.201 0.458 0.581 0.655 0.504 0.619 0.687
2 0.173 0.196 0.201 0.450 0.560 0.634 0.495 0.603 0.670
5 0.200 0.210 0.211 0.417 0.472 0.527 0.478 0.518 0.564
10 0.214 0.216 0.215 0.415 0.439 0.466 0.485 0.502 0.523
Inflation
0.75 0.154 0.167 0.178 0.348 0.332 0.354 0.297 0.341 0.374
1 0.152 0.163 0.171 0.357 0.335 0.351 0.304 0.337 0.374
1.25 0.151 0.160 0.166 0.363 0.337 0.350 0.312 0.330 0.370
1.5 0.149 0.155 0.162 0.373 0.344 0.349 0.338 0.339 0.368
1.75 0.149 0.156 0.159 0.377 0.345 0.350 0.332 0.324 0.364
2 0.148 0.150 0.157 0.379 0.339 0.349 0.338 0.328 0.363
5 0.148 0.150 0.150 0.395 0.373 0.361 0.370 0.350 0.374
10 0.141 0.149 0.149 0.392 0.383 0.362 0.380 0.365 0.362
Note: The interest rate forecasts are for its level at all horizons.