Energy consumption forecasting: Econometric model vs state space model.

Abstract

This study examines the forecasting performance of two major multivariate methodologies: econometric modeling and multivariate state space modeling. The same variables are used in both models to facilitate comparison. They are evaluated by both expost and exante accuracy of U.S. energy consumption forecasts. Econometric models are highly simplified and a model selection procedure is applied to the models. Two different formats of multivariate state space models are examined: economic structure and identity structure. Goodrich's algorithm is employed to estimate the state space models. The state space models in both the econometric structure and the identity structure provided generally good estimates, usually, but not always, these forecasts were more accurate than those by the single econometric models.