Forecasting with panel data

Badi H. Baltagi
(Syracuse University)

Discussion Paper
Series 1: Economic Studies
No 25/2006
Discussion Papers represent the authors personal opinions and do not necessarily reflect the views of the
Deutsche Bundesbank or its staff.
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This paper was presented at the 8th Bundesbank spring conference (May 2006)
on New Developments in Economic Forecasting. The views expressed in the
paper are those of the authors and not necessarily those of the Bundesbank.
 New Developments in Economic Forecasting
8th Bundesbank Spring Conference

(Preliminary programme as at 10 March 2006)

Organisers: Michael Binder, Jrg Breitung, Heinz Herrmann

Eltville, 05/06 May 2006

Friday, 5 May 2006

9:00 - 9:30 Introductory remarks by Axel A Weber (Deutsche Bundesbank)

9:30 - 10:45 Multiple structural breaks, forecasting and present value calculations
Hashem Pesaran (University of Cambridge)

Discussant: Uwe Hassler (Johann Wolfgang Goethe-

University)
Siem Jan Koopman (Free University
Amsterdam)

10:45 11:00 Coffee break

11:00 - 12:15 Testing predictive ability using estimated co integration

relationships: Business as usual?
Lutz Kilian (University of Michigan)

Discussant: Hans-Eggert Reimers (Hochschule Wismar)

Andreas Beyer (European Central Bank)

Deutsche Bundesbank
Protocol and Conferences, K 100
Tel: +49 69 9566-4066/-2864, Fax: +49 69 9566 4027
Mobile: +49 177 7382251, E-mail: conferences@bundesbank.de
12:15 14:00 Lunch

14:00 15:00 Global yield curve dynamics and interactions

Francis X Diebold (University of Pennsylvania)

Discussant: Stefan Mittnik (Ludwig-Maximilians-University

Munich)
Joachim Grammig (Eberhard-Karls-University
Tbingen)

15:00 - 15:15 Coffee break

15:15 - 16:30 A benchmark for models of growth and inflation

Massimiliano Marcellino (Universit Bocconi)

Discussant: George Kapetanios (University of London)

Todd Clark (Federal Reserve Bank of Kansas
City)

16:30 - 17:45 Forecasting with panel data

Badi Baltagi (Texas A&M University)

Discussant: Helmut Herwartz (Christian-Albrechts-University

Kiel)
Jean-Pierre Urbain (University Maastricht)

20:00 Dinner hosted by Axel A Weber (Deutsche Bundesbank)

Speaker: Zdenek Tuma (Czech National Bank)

Deutsche Bundesbank
Protocol and Conferences, K 100
Tel: +49 69 9566-4066/-2864, Fax: +49 69 9566 4027
Mobile: +49 177 7382251, E-mail: conferences@bundesbank.de
Saturday, 6 May 2006

9:30 - 10:45 Did the ECB make a difference for Euro area business cycle?
Fabio Canova* (Universitat Pompeu Fabra)
Matteo Ciccarelli (European Central Bank)
Eva Ortega (Bank of Spain)

Discussant: Sandra Eickmeier (Deutsche Bundesbank)

Domenico Giannone (Universit Libre de
Bruxelles)

10:45 - 11:00 Coffee break

11:00 - 12:15 Bayesian density forecasting with best performing priors determined
by entropic tilting
Charles Whiteman* (University of Iowa)
Kurt Lewis (University of Iowa)

Discussant: John Geweke (University of Iowa)

Stephane Adjemian (CEPREMAP)

12:15 - 13:30 Lunch

13:30 - 14:45 Shrinkage methods for forecasting using many predictors

Mark Watson* (Princeton University)
James Stock (Harvard University)

Discussant: Gary Koop (University of Leicester)

Carlo Favero (Universitat Pompeu Fabra)

Deutsche Bundesbank
Protocol and Conferences, K 100
Tel: +49 69 9566-4066/-2864, Fax: +49 69 9566 4027
Mobile: +49 177 7382251, E-mail: conferences@bundesbank.de
14:45 - 16:00 Forecasting using a large number of predictors
Lucrezia Reichlin (European Central Bank)

Discussant: Christian Schumacher (Deutsche Bundesbank)

Peter Vlaar (Dutch Central Bank)

16:00 Concluding remarks by Hermann Remsperger (Deutsche Bundesbank)

Deutsche Bundesbank
Protocol and Conferences, K 100
Tel: +49 69 9566-4066/-2864, Fax: +49 69 9566 4027
Mobile: +49 177 7382251, E-mail: conferences@bundesbank.de
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Non-technical summary

This paper provides a brief overview of forecasting with panel data. First, it discusses
what the best linear unbiased prediction is when various assumptions are made about the error
term, i. e. one-way error components, whereby the error term entails an unobservable individ-
ual effect; two-way error components, where the error term entails an unobservable individual
effect and a time-specific effect; serial correlation in the error term; error terms with spatial
correlation. Second, the paper considers heterogeneous data models versus homogeneous data
models. It reviews numerous papers and discusses the conditions under which heterogeneous
or homogeneous panel estimators perform better and in which cases pooling techniques are
preferable to single country forecasts. Finally, the paper points to several outstanding issues
and indicates the work which needs to be done if further progress is to be made in forecasting
in a panel environment.
Nicht-technische Zusammenfassung

Dieses Papier gibt einen kurzen berblick ber die Prognose mit Paneldaten. Zunchst
diskutiert es den besten linearen unverzerrten Schtzer wenn verschiedene Annahmen hin-
sichtlich des Fehlerterms gegeben sind: Der Fehlerterm enthlt einen unbeobachtbaren indivi-
duellen Effekt; der Fehlerterm enthlt sowohl einen unbeobachtbaren individuellen als auch
einen zeitspezifischen Effekt; der Fehlerterm ist zeitlich korreliert; der Fehlerterm ist rumlich
korreliert. Anschlieend betrachtet das Papier Modelle mit heterogenen und homogenen Da-
ten. Es gibt einen berblick ber viele Papiere und diskutiert, unter welchen Bedingungen
homogene oder heterogene Panelschtzer sich als berlegen erwiesen haben und wo sich Poo-
lingtechniken gegenber Einzelgleichungsanstzen bei der Prognose als berlegen gezeigt
haben. Schlielich wirft das Papier mehrere offene Fragen auf und zeigt welche Arbeiten
noch zu erledigen sind, um bei der Prognose mit Paneldaten Fortschritte zu machen.
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28
The following Discussion Papers have been published since 2005:
Series 1: Economic Studies

1 2005 Financial constraints and capacity adjustment

in the United Kingdom Evidence from a Ulf von Kalckreuth
large panel of survey data Emma Murphy
2 2005 Common stationary and non-stationary
factors in the euro area analyzed in a
large-scale factor model Sandra Eickmeier

3 2005 Financial intermediaries, markets, F. Fecht, K. Huang,

and growth A. Martin

4 2005 The New Keynesian Phillips Curve

in Europe: does it fit or does it fail? Peter Tillmann

5 2005 Taxes and the financial structure Fred Ramb

of German inward FDI A. J. Weichenrieder

6 2005 International diversification at home Fang Cai

and abroad Francis E. Warnock

7 2005 Multinational enterprises, international trade,

and productivity growth: Firm-level evidence Wolfgang Keller
from the United States Steven R. Yeaple

8 2005 Location choice and employment S. O. Becker,

decisions: a comparison of German K. Ekholm, R. Jckle,
and Swedish multinationals M.-A. Muendler

9 2005 Business cycles and FDI: Claudia M. Buch

evidence from German sectoral data Alexander Lipponer

10 2005 Multinational firms, exclusivity, Ping Lin

and the degree of backward linkages Kamal Saggi

29
11 2005 Firm-level evidence on international Robin Brooks
stock market comovement Marco Del Negro

12 2005 The determinants of intra-firm trade: in search Peter Egger

for export-import magnification effects Michael Pfaffermayr

13 2005 Foreign direct investment, spillovers and

absorptive capacity: evidence from quantile Sourafel Girma
regressions Holger Grg

14 2005 Learning on the quick and cheap: gains James R. Markusen

from trade through imported expertise Thomas F. Rutherford

15 2005 Discriminatory auctions with seller discretion:

evidence from German treasury auctions Jrg Rocholl

16 2005 Consumption, wealth and business cycles: B. Hamburg,

why is Germany different? M. Hoffmann, J. Keller

17 2005 Tax incentives and the location of FDI: Thiess Buettner

evidence from a panel of German multinationals Martin Ruf

18 2005 Monetary Disequilibria and the Dieter Nautz

Euro/Dollar Exchange Rate Karsten Ruth

19 2005 Berechnung trendbereinigter Indikatoren fr

Deutschland mit Hilfe von Filterverfahren Stefan Stamfort

20 2005 How synchronized are central and east

European economies with the euro area? Sandra Eickmeier
Evidence from a structural factor model Jrg Breitung

21 2005 Asymptotic distribution of linear unbiased J.-R. Kurz-Kim

estimators in the presence of heavy-tailed S.T. Rachev
stochastic regressors and residuals G. Samorodnitsky

30
22 2005 The Role of Contracting Schemes for the
Welfare Costs of Nominal Rigidities over
the Business Cycle Matthias Paustian

23 2005 The cross-sectional dynamics of German J. Dpke, M. Funke

business cycles: a birds eye view S. Holly, S. Weber

24 2005 Forecasting German GDP using alternative Christian Schumacher

factor models based on large datasets

25 2005 Time-dependent or state-dependent price

setting? micro-evidence from German
metal-working industries Harald Stahl

26 2005 Money demand and macroeconomic Claus Greiber

uncertainty Wolfgang Lemke

27 2005 In search of distress risk J. Y. Campbell,

J. Hilscher, J. Szilagyi

28 2005 Recursive robust estimation and control Lars Peter Hansen

without commitment Thomas J. Sargent

29 2005 Asset pricing implications of Pareto optimality N. R. Kocherlakota

with private information Luigi Pistaferri

30 2005 Ultra high frequency volatility estimation Y. At-Sahalia,

with dependent microstructure noise P. A. Mykland, L. Zhang

31 2005 Umstellung der deutschen VGR auf Vorjahres-

preisbasis Konzept und Konsequenzen fr die
aktuelle Wirtschaftsanalyse sowie die kono-
metrische Modellierung Karl-Heinz Tdter

31
32 2005 Determinants of current account developments
in the central and east European EU member
states consequences for the enlargement of Sabine Herrmann
the euro erea Axel Jochem

33 2005 An estimated DSGE model for the German

economy within the euro area Ernest Pytlarczyk

34 2005 Rational inattention: a research agenda Christopher A. Sims

35 2005 Monetary policy with model uncertainty: Lars E.O. Svensson

distribution forecast targeting Noah Williams

36 2005 Comparing the value revelance of R&D report- Fred Ramb

ing in Germany: standard and selection effects Markus Reitzig

37 2005 European inflation expectations dynamics J. Dpke, J. Dovern

U. Fritsche, J. Slacalek

38 2005 Dynamic factor models Sandra Eickmeier

Jrg Breitung

39 2005 Short-run and long-run comovement of

GDP and some expenditure aggregates
in Germany, France and Italy Thomas A. Knetsch

40 2005 Awreckers theory of financial distress Ulf von Kalckreuth

41 2005 Trade balances of the central and east

European EU member states and the role Sabine Herrmann
of foreign direct investment Axel Jochem

42 2005 Unit roots and cointegration in panels Jrg Breitung

M. Hashem Pesaran

43 2005 Price setting in German manufacturing:

new evidence from new survey data Harald Stahl

32
1 2006 The dynamic relationship between the Euro
overnight rate, the ECBs policy rate and the Dieter Nautz
term spread Christian J. Offermanns

2 2006 Sticky prices in the euro area: a summary of lvarez, Dhyne, Hoeberichts
new micro evidence Kwapil, Le Bihan, Lnnemann
Martins, Sabbatini, Stahl
Vermeulen, Vilmunen

3 2006 Going multinational: What are the effects

on home market performance? Robert Jckle

4 2006 Exports versus FDI in German manufacturing:

firm performance and participation in inter- Jens Matthias Arnold
national markets Katrin Hussinger

5 2006 A disaggregated framework for the analysis of Kremer, Braz, Brosens

structural developments in public finances Langenus, Momigliano
Spolander

6 2006 Bond pricing when the short term interest rate Wolfgang Lemke
follows a threshold process Theofanis Archontakis

7 2006 Has the impact of key determinants of German

exports changed?
Results from estimations of Germanys intra
euro-area and extra euro-area exports Kerstin Stahn

8 2006 The coordination channel of foreign exchange Stefan Reitz

intervention: a nonlinear microstructural analysis Mark P. Taylor

9 2006 Capital, labour and productivity: What role do Antonio Bassanetti

they play in the potential GDP weakness of Jrg Dpke, Roberto Torrini
France, Germany and Italy? Roberta Zizza

10 2006 Real-time macroeconomic data and ex ante J. Dpke, D. Hartmann

predictability of stock returns C. Pierdzioch

33
11 2006 The role of real wage rigidity and labor market
frictions for unemployment and inflation Kai Christoffel
dynamics Tobias Linzert

12 2006 Forecasting the price of crude oil via

convenience yield predictions Thomas A. Knetsch

13 2006 Foreign direct investment in the enlarged EU:

do taxes matter and to what extent? Guntram B. Wolff

14 2006 Inflation and relative price variability in the euro Dieter Nautz
area: evidence from a panel threshold model Juliane Scharff

15 2006 Internalization and internationalization

under competing real options Jan Hendrik Fisch

16 2006 Consumer price adjustment under the

microscope: Germany in a period of low Johannes Hoffmann
inflation Jeong-Ryeol Kurz-Kim

17 2006 Identifying the role of labor markets Kai Christoffel

for monetary policy in an estimated Keith Kster
DSGE model Tobias Linzert

18 2006 Do monetary indicators (still) predict

euro area inflation? Boris Hofmann

19 2006 Fool the markets? Creative accounting, Kerstin Bernoth

fiscal transparency and sovereign risk premia Guntram B. Wolff

20 2006 How would formula apportionment in the EU

affect the distribution and the size of the Clemens Fuest
corporate tax base? An analysis based on Thomas Hemmelgarn
German multinationals Fred Ramb

34
21 2006 Monetary and fiscal policy interactions in a New
Keynesian model with capital accumulation Campbell Leith
and non-Ricardian consumers Leopold von Thadden

22 2006 Real-time forecasting and political stock market Martin Bohl, Jrg Dpke
anomalies: evidence for the U.S. Christian Pierdzioch

23 2006 A reappraisal of the evidence on PPP:

a systematic investigation into MA roots Christoph Fischer
in panel unit root tests and their implications Daniel Porath

24 2006 Margins of multinational labor substitution Sascha O. Becker

Marc-Andreas Mndler

25 2006 Forecasting with panel data Badi H. Baltagi

35
 Series 2: Banking and Financial Studies

1 2005 Measurement matters Input price proxies

and bank efficiency in Germany Michael Koetter

2 2005 The supervisors portfolio: the market price

risk of German banks from 2001 to 2003 Christoph Memmel
Analysis and models for risk aggregation Carsten Wehn

3 2005 Do banks diversify loan portfolios? Andreas Kamp

A tentative answer based on individual Andreas Pfingsten
bank loan portfolios Daniel Porath

4 2005 Banks, markets, and efficiency F. Fecht, A. Martin

5 2005 The forecast ability of risk-neutral densities Ben Craig

of foreign exchange Joachim Keller

6 2005 Cyclical implications of minimum capital

requirements Frank Heid

7 2005 Banks regulatory capital buffer and the

business cycle: evidence for German Stphanie Stolz
savings and cooperative banks Michael Wedow

8 2005 German bank lending to industrial and non-

industrial countries: driven by fundamentals
or different treatment? Thorsten Nestmann

9 2005 Accounting for distress in bank mergers M. Koetter, J. Bos, F. Heid

C. Kool, J. Kolari, D. Porath

10 2005 The eurosystem money market auctions: Nikolaus Bartzsch

a banking perspective Ben Craig, Falko Fecht

11 2005 Financial integration and systemic Falko Fecht

risk Hans Peter Grner

36
12 2005 Evaluating the German bank merger wave Michael Koetter

13 2005 Incorporating prediction and estimation risk A. Hamerle, M. Knapp,

in point-in-time credit portfolio models T. Liebig, N. Wildenauer

14 2005 Time series properties of a rating system U. Krger, M. Sttzel,

based on financial ratios S. Trck

15 2005 Inefficient or just different? Effects of J. Bos, F. Heid, M. Koetter,

heterogeneity on bank efficiency scores J. Kolatri, C. Kool

01 2006 Forecasting stock market volatility with J. Dpke, D. Hartmann

macroeconomic variables in real time C. Pierdzioch

02 2006 Finance and growth in a bank-based economy: Michael Koetter

is it quantity or quality that matters? Michael Wedow

03 2006 Measuring business sector concentration

by an infection model Klaus Dllmann

04 2006 Heterogeneity in lending and sectoral Claudia M. Buch

growth: evidence from German Andrea Schertler
bank-level data Natalja von Westernhagen

05 2006 Does diversification improve the performance Evelyn Hayden

of German banks? Evidence from individual Daniel Porath
bank loan portfolios Natalja von Westernhagen

37
Visiting researcher at the Deutsche Bundesbank

The Deutsche Bundesbank in Frankfurt is looking for a visiting researcher. Among others
under certain conditions visiting researchers have access to a wide range of data in the
Bundesbank. They include micro data on firms and banks not available in the public.
Visitors should prepare a research project during their stay at the Bundesbank. Candidates
must hold a Ph D and be engaged in the field of either macroeconomics and monetary
economics, financial markets or international economics. Proposed research projects
should be from these fields. The visiting term will be from 3 to 6 months. Salary is
commensurate with experience.

Applicants are requested to send a CV, copies of recent papers, letters of reference and a
proposal for a research project to:

Deutsche Bundesbank
Personalabteilung
Wilhelm-Epstein-Str. 14

D - 60431 Frankfurt
GERMANY

38