Econometric forecasting at mixed frequencies: Application to Mexico's economy Part I. Mexican high frequency and low frequency econometric models

Abstract

In a two-part paper, we apply to the Mexican economy the methodology of forecasting at mixed frequencies developed by Klein and Kushnirsky [23]. We construct two macroeconometric models for Mexico – high frequency, with monthly observations, and low frequency, with annual observations. For each model we provide a description of the data, their sources, and methods of computation. The equations of the high frequency model follow the stages of the calculation of Mexico's GDP using two parallel approaches, output and expenditure, and averaging the results. The equations of the low frequency model are grouped into three blocks: production, consumption, and investment; foreign direct investment and trade; and wages, prices, and finance. Our methodology demonstrates how the high frequency model can be used for periodic adjustments of selected key indicators in the low frequency model, especially fixing initial conditions for the dynamics of the low frequency model so that it may be extrapolated a few years into the future. The methodology includes a theoretical foundation, methods for the adjustment of model structures and properties, procedures for achieving mutually consistent solutions, and step-by-step applications.