Direct and indirect forecasting of the money multiplier and velocity of circulation in the United Kingdom

This paper compares the direct and indirect methods of predicting the money multiplier and velocity of circulation in the UK economy. Forecasts are generated using the autoregressive (AR) model and Harvey's structural time series model. In addition to point forecasts, prediction intervals (calculated by using the recently proposed bootstrap-after-bootstrap) are used for comparing forecasting accuracy. The results turn out to be mixed but the overall evidence seems to be in favour of the direct method. It is suggested that this may be due to the pooling of time series (as implied by the definition), which reduces the noise associated with individual time series.