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This paper develops a time series model to forecast the growth in imports by major advanced economies in the current and following year (two to six quarters ahead). Both pure time series analysis and structural approaches that include additional predictors based on economic theory are used. Our results compare favourably with other trade forecasts, as measured by standard evaluation statistics and can serve as a benchmark for more complex macroeconomic models.
JEL classification: F17, C53, C32, C22
Keywords: forecasting, time series, international trade
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1. Introduction
Short-term forecasting of key economic variables, such as GDP and inflation, has a long tradition, as many important business and investment decisions are based on forecasts for the outlook of the economy (Blix et al., 2001). In a "globalized" world characterized over the last several decades by increasing inter-dependency among nations involving intensive political, social and economic interaction the need for predictions of key economic parameters both at home and abroad has increased. With the important role that trade has played in this wider process of globalization (WTO, 2008), it is no surprise that projections of exports and imports of major trading nations and regional blocs have become a central feature of providers of economic forecasts. Especially, in the current climate of economic crisis, many of the open economies that have enjoyed decades of high economic growth and have been badly affected by the global downturn are expected to be better placed to stage a faster and stronger recovery when the expansion of trade resumes (WTO, 2009).
At the international level, the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) are leading providers of macroeconomic data and forecasts, including on import and export performance.1 Two aspects of the way in which such forecasts are produced call for particular attention and have largely motivated the approach that we develop in this paper: First, the OECD and IMF use large structural macroeconomic models of the world economy (called INTERLINK and MULTIMOD respectively). The goal is to establish consistency between the different economic variables and countries through international financial and trade linkages (OECD, 2004; IMF, 2005). The primary purpose of the predictions made on the basis of these models is not to produce...