Forecasting the recent behavior of US business fixed investment spending: an analysis of competing models

Abstract

We evaluate forecasting models of US business fixed investment spending growth over the recent 1995:1-2004:2 out-of-sample period. The forecasting models are based on the conventional Accelerator, Neoclassical, Average Q, and Cash-Flow models of investment spending, as well as real stock prices and excess stock return predictors. The real stock price model typically generates the most accurate forecasts, and forecast-encompassing tests indicate that this model contains most of the information useful for forecasting investment spending growth relative to the other models at longer horizons. In a robustness check, we also evaluate the forecasting performance of the models over two alternative out-of-sample periods: 1975:1-1984:4 and 1985:1-1994:4. A number of different models produce the most accurate forecasts over these alternative out-of-sample periods, indicating that while the real stock price model appears particularly useful for forecasting the recent behavior of investment spending growth, it may not continue to perform well in future periods.

Corporate investment during the financial crisis: Evidence from China

“…Using US data for the period 1995-2004 Rapach and Wohar (2007) document that the stock price model had the lowest mean square error at longer horizons, though that is not always so for shorter periods.…”

Federal Reserve and private forecasts of growth in investment

“…2 SeeChirinko (1993) andKopcke and Bauman (2001) for various models of business investment. For forecasting models, seeRapach and Wohar (2007) and the references cited therein.…”

Tobin's q and U.S. inflation

“…For capital stock, Augmented Dickey-Fuller and Ng-Perron tests suggest I (1) series, in contrast to the KPSS which rejects the stationary null. Given the good size and power of Ng-Perron tests and that recent research in Rapach and Wohar (2007) documents that the unit root hypothesis cannot be rejected on U.S. real business fixed investment spending, we proceed with the assumption that K follows an I (1) process as well.…”