The homogeneity restriction and forecasting performance of VAR‐type demand systems: an empirical examination of US meat consumption

Abstract

AbstractThis paper compares the forecast performance of vector‐autoregression‐type (VAR) demand systems with and without imposing the homogeneity restriction in the cointegration space. US meat consumption (beef, poultry and pork) data are studied. One up to four‐steps‐ahead forecasts are generated from both the theoretically restricted and unrestricted models. A modified Diebold–Mariano test of the equality of mean squared forecast errors (MSFE) and a forecast encompassing test are applied in forecast evaluation. Our findings suggest that the imposition of the homogeneity restriction tends to improve the forecast accuracy when the restriction is not rejected. The evidence is mixed when the restriction is rejected. Copyright © 2002 John Wiley & Sons, Ltd.