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The role of the log transformation in forecasting economic variables

Lütkepohl, H. and Xu, F. (2012) The role of the log transformation in forecasting economic variables. Empirical Economics, 42 (3). pp. 619-638. ISSN 1435-8921

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To link to this article DOI: 10.1007/s00181-010-0440-1

Abstract/Summary

For forecasting and economic analysis many variables are used in logarithms (logs). In time series analysis, this transformation is often considered to stabilize the variance of a series. We investigate under which conditions taking logs is beneficial for forecasting. Forecasts based on the original series are compared to forecasts based on logs. For a range of economic variables, substantial forecasting improvements from taking logs are found if the log transformation actually stabilizes the variance of the underlying series. Using logs can be damaging for the forecast precision if a stable variance is not achieved.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:26587
Publisher:Springer

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