Evaluating the forecasting power of foreign Country's income growth: a global analysis

Abstract

PurposeThe objective of the paper is to explore the out-of-sample forecasting connections in income growth across the globe.Design/methodology/approachAn autoregressive distributed lag (ARDL) framework is employed and the forecasting performance is analyzed across several horizons using different forecast combination techniques.FindingsResults show that the foreign country's income provides superior forecasts beyond what is provided by the country's own past income movements. Superior forecasting power is particularly held by Belgium, Korea, New Zealand, the UK and the US, while these countries' income is rather difficult to predict by global counterparts. Contrary to conventional wisdom, improved forecasts of income can be obtained even for longer horizons using our approach. Results also show that the forecast combination techniques yield higher forecasting gains relative to individual model forecasts, both in magnitude and the number of countries.Research limitations/implicationsThe forecasting paths of income movement across the globe reveal that predictive power greatly differs across countries, regions and forecast horizons. The countries that are difficult to predict in the short run are often seen to be predictable by global income movements in the long run.Practical implicationsEven while it is difficult to predict the income movements at an individual country level, combining information from the income growth of several countries is likely to provide superior forecasting gains. And these gains are higher for long-horizon forecasts as compared to the short-horizon forecast.Social implicationsIn evaluating the forward-looking social implications of economic policy changes, the policymakers should also consider the possible global forecasting connections revealed in the study.Originality/valueEmploying an ARDL model to explore global income forecasting connections across several forecast horizons using different forecast combination techniques.