Macroeconomic forecasting using low-frequency filters

We consider univariate low-frequency filters applicable in real-time as a macroeconomic forecasting method. This amounts to targeting only low frequency fluctuations of the time series of interest. We show through simulations that such approach is warranted and, using US data, we confirm empirically that consistent gains in forecast accuracy can be obtained in comparison with a variety of other methods. There is an inherent arbitrariness in the choice of the cut-off defining low and high frequencies, which calls for a careful characterization of the implied optimal (for forecasting) degree of smoothing of the key macroeconomic indicators we analyse. We document interesting patterns that emerge: for most variables the optimal choice amounts to disregarding fluctuations well below the standard business cycle cut-off of 32 quarters while generally increasing with the forecast horizon; for inflation and variables related to housing this cut-off lies around 32 quarters for all horizons, which is below the optimal level for federal government spending.