CHAPTER 10
FORECASTING THE LONG TERM:
DETERMINISTIC AND STOCHASTIC TRENDS
Figure 10.1 Economic Time Series with Trends
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10.1 Deterministic Trends
Figure 10.2 Time Series with Linear Deterministic Trend
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10.1.1 Trend Shapes
Figure 10.3 Common Deterministic Trends
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Figure 10.4 Growth Rate with Linear and Quadratic Deterministic Trends
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10.1.3 Optimal Forecasting
Figure 10.5 Home Mortgage Outstanding Debt (Billions of Dollars)
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Table 10.1 Deterministic Trend Specifications
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Table 10.2 Least Squares Estimation of a Polynomial Trend
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Figure 10.6 Forecast of Outstanding Mortgage Debt Based on Table 10.2
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Figure 10.7 Correlograms of the Residuals of the Fourth Polynomial Trend Model
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Table 10.3 Least Squares Estimation of Trend and AR Model
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10.2 Stochastic Trends
10.2.1 Trend Shapes
Figure 10.8 Random Walk without Drift and with Drift
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10.2.2 Stationarity Properties
Figure 10.9 Autocorrelograms of Random Walks
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10.2.2.1 Testing for Unit Root
Table 10.4 Dickey-Fuller Critical Values for a 5% Critical Region
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Table 10.5 Unit Root Testing Procedure
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10.2.3 Optimal Forecast
Figure 10.10 Differences in the Forecasts of Random Walk and
Trend-Stationary Processes
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Figure 10.11 Index of Total Hours Worked in United States and Spain
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Table 10.6 Augmented Dickey-Fuller Unit Root Test on Spain
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Figure 10.12 Correlogram of Residuals
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Table 10.7 Augmented Dickey-Fuller Unit Root Test on Spain
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Table 10.8 Least Squares Estimation of Yt 1Yt 1 t
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Table 10.9 Four-Step-Ahead Forecast of Index of Total Hours Worked in Spain
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Figure 10.13 Forecast of Index Total Hours Worked in Spain with
95% Confidence Bands
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Table 10.10 Augmented Dickey-Fuller Unit Root Test on the United States
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Table 10.11 Least Squares Estimation of Index of Total Hours Worked
in the United States
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