Adjusting Band-Regression Estimators for Prediction: Shrinkage and Downweighting

This paper proposes further developments of band-regression models for forecasting purposes, namely a simple method for shrinking the parameter estimates as well as a method for the automatic selection of the underlying frequency band. In combination with a method for downweighting older data, the improved band-regression model is used to forecast real GDP growth across nine industrialized economies. The results of this empirical study show that this forecasting approach outperforms conventional forecasting methods. As a secondary finding, the empirical results also raise doubts whether the yield-curve spread is really a valuable leading indicator of GDP growth.