L08 - Benchmarking Techniques (ENG)

1
Quarterly National Accounts Course

Joint Vienna Institute
August 5 - 16, 2013
L-8: Benchmarking Techniques
Reproductions of this material or any parts of it should refer to the IMF Statistics Department as the source
Lecture Outline
Benchmarking Principles in QNA Benchmarking Principles in QNA
The Denton PFD method
Enhanced formula for extrapolation
Benchmarking and revisions
JVI/QNA/L8 : 2 IMF Statistics Department
2
Introduction
Quarterly compilation involves: Q y p
Establishing a set of quarterly national accounts
for periods the annual estimates are available
Construction of historical quarterly accounts
Updating a set of quarterly national accounts -
derivation of quarterly estimates for most
current periods with no annual estimates current periods with no annual estimates
Discrepancy Between QNA and ANA
Discrepancies occur due to: Discrepancies occur due to:
Independent collection of quarterly and annual
data sources for the same phenomena
Quarterly data based on (smaller) sample surveys
using simplified questionnaires
Annual data based on censuses/larger sample
surveys using more comprehensive questionnaires
Annual data based on data from audited business
accounts
3
More information, and more detailed
information, available annually
Quarterly estimates based on:
Fixed input output coefficients
Trend extrapolations Trend extrapolations
Guesstimates
Compilation procedures for annual and quarterly
national accounts estimates may differ
Annual accounts more detailed
Annual accounts more complete
Use of supply and use tables as compilation tool for Use o supp y a d use tab es as co p at o too o
the annual accounts
Use of simplified methods in the quarterly accounts
4
Discrepancies removed by p y
Benchmarking the quarterly data to the ANA
estimates
So that
Time series of quarterly and annual data for the
same phenomena are consistent
Accuracy and quality of the quarterly data are Accuracy and quality of the quarterly data are
increased
Quarterly data could be used to forecast annual
data
Benchmarking: Basic Approaches
Manual reconciliation and revision of
independent annual and quarterly data sources,
and annual and quarterly estimates
Mechanical methods
Pro-rata distribution breaks in series (the step
problem)
Time series method no breaks in series Time series method no breaks in series
5
Pro Rata Distribution and Step Problem
Distribution presentation X
q
is the level of the Distribution presentation X
q,
is the level of the
QNA estimate for
quarter q of year
I
q,
is the level of the
indicator in quarter
q of year
|
|
.
|
\
|
=
q q
q
q
I
I
A X
|
|
| |
,
,
.
q y
A
is the level of the

ANA estimate for
year
. \
q q I | ,
JVI/QNA/L8 : 9
IMF Statistics
Department
Benchmark-to-indicator X
q
is the level of the Benchmark to indicator
ratio presentation
X
q,
is the level of the
QNA estimate for
quarter q of year
I
q,
is the level of the
q of year
|
|
.
|
\
|
=
q
q q
I
A
I X
|
|
| | , ,
.
q y
A
is the level of the

ANA estimate for
year
. \
q q I | ,
JVI/QNA/L8 : 10
IMF Statistics
Department
6
Both equations are algebraically equivalent
Only the presentation differs
Extrapolation with an Indicator
For the quarters of the current year or even the q y
most recent year, independent ANA data are
not available.
QNA estimates for these periods should be
consistent with the QNA estimates for previous
periods that are benchmarked to the annual
data.
M t i th t l i di t i d t Movements in the quarterly indicator is used to
extrapolate/update the QNA estimates
(benchmarked to the ANA) to derive the QNA
estimates for quarters with no ANA estimates.
7
Extrapolation presentation X
q
is the level of the Extrapolation presentation X
q,
is the level of the
QNA estimate for
quarter q of year
I
q,
is the level of the
|
|
.
|
\
|
=
+
+
I
I
X X
q
q
|
|
| |
, 4
1 ,
, 4 1 ,
.
q of year
. \
| , 4
JVI/QNA/L8 : 13
IMF Statistics
Department
Benchmark-to-indicator X
q
is the level of the Benchmark to indicator
presentation
X
q,
is the level of the
QNA estimate for
quarter q of year
I
q,
is the level of the
|
|
.
|
\
|
=
+ +
I
X
I X q q
|
|
| |
, 4
, 4
1 , 1 ,
.
q of year
. \
| , 4
JVI/QNA/L8 : 14
IMF Statistics
Department
8
Pro Rata Distribution: Step Problem
98 0
100.0
102.0
104.0
106.0
108.0 -------------------------Back Series-------------------------
980
1000
1020
1040
1060
1080 -------Forward series-----
96.0
98.0
1997 1998 1999
960
980
Indicator (left hand scale)
QNA estimates derived using pro rata distribution (right hand scale)
Pro Rata Distribution: Step Problem
Benchmark-to-indicator ratio Benchmark to indicator ratio
9.8
10.3
1997 1998 1999
9
Golden rules of Benchmarking
A benchmarking procedure should satisfy two g p y
requirements at the same time:
Preserve as much as possible the short-term
movements in the quarterly source data under
the restrictions provided by the annual data
Ensure, for the forward series, that the sum of
the four quarters of the current year is as close
ibl t th k f t l d t as possible to the unknown future annual data
Benchmarking Methods That Avoid Steps
Time series method avoiding steps Time series method avoiding steps
Various, but same purpose
Keeps the movements of the short-term benchmarked
series as proportional as possible to those in the
original series
10
Benchmarking Methods That Avoid Steps
Proportional Denton method Proportional Denton method
Keeps the movements in the benchmarked QNA series
as proportional as possible to those in the quarterly
indicator series using a least square technique to
minimize the difference in relative adjustment to
neighboring quarters subject to annual total constraint.
Optimal Benchmarking Solution
For the back series, the method ,
recommended in the IMF QNA manual is the
Proportional First Differences (PFD) solution
proposed by Denton (1971) which
Preserves the short-term movements in the
indicators keeping the quarterly estimates as
proportional to the indicator as possible
(avoid the step problem)
Considers the annual benchmarks as binding
constraints
11
Denton PFD method
In mathematical terms, the benchmarked ,
series X
t
is the solution of the following
minimization problem:
{ } N t for
Y
X
Y
X
N
t t
4 ,..., 2 , 1 min
2
4
1
e
(

{ } N T for A X t s
Y Y
T
T t
t
t
t t
,..., 2 , 1 . .
2
1
e =

e
=

Proportional Denton Method
Benchmarking without Step Problems Benchmarking without Step Problems
98.0
100.0
102.0
104.0
106.0
108.0
980
1000
1020
1040
1060
1080
------------------ Back series ------------------------------- ----Forward series ----
96.0
1997 1998 1999
960
Indicator (left hand scale)
QNA estimates derived using pro rata distribution (right hand scale)
1997-98 distributed 1999 extrapolated using Proportional Denton (right hand scale)
12
Proportional Denton Method
Benchmark-to-Indicator Ratios
10.3
9.8
1997 1998 1999
1997-98 distributed 1999 extrapolated using Proportional Denton Annual step change
Improving extrapolation of QNA results
Using proportional Denton method implies that Using proportional Denton method implies that
the B-I ratio for the fourth quarter of the last
benchmarked year is used to prepare the forward
QNA series
The B-I ratios for quarters with ANA data are
usually different and change smoothly y g y
Depends on the movements in the annual B-I ratios
13
For the forward series, the Denton PFD ,
method results in quarter-to-quarter rates of
change that are identical to those in the
indicator series. But
When there is a bias between the movements of the
target variable and those of the indicator,
extrapolations should be adjusted to better predict
the next annual growth rate of the target variable
An adjustment (or enhancement) to the original
Denton method is proposed in the IMFs QNA manual
(chapter 6)
The B-I ratios for quarters with no ANA data can The B I ratios for quarters with no ANA data can
be improved by
Forecasting annual B-I ratios
Deriving quarterly B-I ratios taking into account the
forecasted annual B-I ratio
14
Denton PFD method with enhancement for
extrapolation
The minimization problem changes into:
{ }
{ }
4
2
1
2
1
4 min for 1, 2, , ,
t t
t
t t
N s
X X
t
I I
N s
=

+
+
(
e
(

p g
B-I forecast for year N+1
{ }
{ }
4
1
4
4 1
1
,
s.t.
for 1, 2, 3, 4
, for 1, 2, ,
t T
t T
N s
t N
t
t N
t N
X A T N
X A
w s
I I
e
+
+
= +
+
= e
= e

Benchmarking and Revisions
When the ANA data becomes available: When the ANA data becomes available:
The QNA data for that year are benchmarked to the
ANA data
The QNA data for the quarters of the subsequent years
are revised
The QNA data for earlier years are revised
15
Benchmarking and Revisions
When ANA data for previous years are revised: When ANA data for previous years are revised:
The QNA data for those years are benchmarked to the
revised ANA data
The QNA data for the quarters of the subsequent years
are revised
The QNA data for earlier years are revised
Benchmarking and Revision
Incorporation of new annual data for one year p y
will generate revisions of quarterly data for
neighboring years
The Denton method is optimal because
revisions for one year are distributed smoothly
over several quarters, not just within the same
year year
The enhanced Denton method tries to improve
the B-I forecast for the next year, and then
reduce revisions to preliminary QNA data

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Quarterly National Accounts Course

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JVI/QNA/L8 : 27 IMF Statistics Department

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