The forecasting attributes of trend‐ and difference‐stationary representations for macroeconomic time series

We analyse the forecasting attributes of trenc and diffence‐stationary representations of the U.S. macroeconomic time series sudied by Nelson and Plosser (1982). Predictive densities based on models estimated for these series (which terminate in 1970) are compared with subsequent realizations compiled by Schotman and van Dijk (1991) which terminate in (1988). Predictive densities obtained using the, extended series are also derived to assess the impact of the subsequent realization on long‐range forecasts. Of particular interest are comparisons of the average intervals of predictive densities corresponding to the competing specifications In general, we find that coverage intervals based on diference‐stationary specifications are far wider than those based or. trend‐stationary specifications for the real series, and slightly wider for the nominal series. This additional width is often a virtue in forecasting nuninal series over the 1971‐1988 period, as the inflation experienced durnig this time was unprecedented in the 1900s. However, the evolution of the real series has been relatively stable in the 1900s, hence the uncertainty associated with difference‐stationary specifications generally seems excessive for these data.