CEA Economic Forecasting Techniques 3

Question 1

In a Vector Autoregression (VAR) model, lag length selection is critical. Which information criterion penalizes additional parameters most heavily, often selecting the most parsimonious model?

Accepted Answer

Bayesian Information Criterion (BIC)

Answer

The BIC (Schwarz criterion) applies the strongest penalty for additional parameters, consistently selecting shorter lag lengths than AIC in large samples.

Question 2

Which scenario best illustrates the 'Lucas critique' in economic forecasting?

Accepted Answer

Policy changes alter agent behavior, invalidating forecasts based on historical relationships

Answer

Robert Lucas argued that structural parameters estimated from historical data change when policy regimes shift, rendering reduced-form forecasts unreliable.

Question 3

A fan chart in economic forecasting is used to:

Accepted Answer

Communicate forecast uncertainty through probability bands around a central forecast

Answer

Fan charts show widening probability intervals (e.g., 50%, 75%, 90% confidence bands) to convey that uncertainty grows with the forecast horizon.

Question 4

The Diebold-Mariano test is used to:

Accepted Answer

Compare the predictive accuracy of two competing forecasting models

Answer

The Diebold-Mariano test assesses whether differences in forecast accuracy between two models are statistically significant using a loss differential statistic.

Question 5

Regime-switching models, such as Hamilton's Markov-switching model, are particularly useful for economic forecasting because they:

Accepted Answer

Allow model parameters to change discretely across unobserved states (e.g., recession vs. expansion)

Answer

Markov-switching models capture nonlinearities by allowing parameters to shift probabilistically across latent states, improving recession and expansion forecasting.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Economic Forecasting Techniques 3