Econometric forecasting of production matrix by total output in the framework of interindustry balance: Evidence from European firms

Abstract

The paper is devoted to testing the core prerequisite of inter-industry balance methodology which states, that intermediate consumption is strictly proportional to the total output of an industry, or, in other words, production matrix is constant over time. The paper uses standard econometric and statistical tools to test the hypothesis of proportionality of intermediate consumption to the total output. The statistical base of the study is the world input-output tables collected for the period from 2000 to 2022 from European firms. By conducting a rigorous empirical analysis, we find that tested prerequisite cannot be considered as valid. We also propose a methodology of point forecasting of production matrices by total output, which helps to make more accurate forecasts compared to the trivial model, when production matrix is assumed to stay unchanged. The proposed methodology is to extend the input-output methodology by introducing the coefficients of proportionality of changes in intermediate consumption and changes in the total output. Proportionality coefficients are proposed to be obtained by regression equations based on statistical data of input-output tables. The results of this work can be useful for executive authorities in planning large state economic projects, as well as in assessing the impact of external shocks on the country's economy.