The role of the log transformation in forecasting economic variables
Title: The role of the log transformation in forecasting economic variables
Citation: Empirical Economics, 2012, Vol. 42, No. 3, pp. 619-638
ISSN: 1435-8921; 0377-7332
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.
Published version of EUI MWP WP 2009/06
Initial version: http://hdl.handle.net/1814/11150
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