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Combining VAR and DSGE forecast densities

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  • Wolden Bache, Ida
  • Sofie Jore, Anne
  • Mitchell, James
  • Vahey, Shaun P.

Abstract

A popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions (VARs) and a policymaking DSGE model. The DSGE receives a substantial weight in the pool (at short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, but produces well-calibrated forecast densities for inflation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 1659-1670

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1659-1670

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Ensemble modeling Forecast densities Forecast evaluation VAR models DSGE models;

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. DSGE models and forecasting
    by Christian Zimmermann in NEP-DGE blog on 2009-12-21 00:35:25
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Periklis Gogas & Theophilos Papadimitriou & Elvira Takli, 2013. "Comparison of simple sum and Divisia monetary aggregates in GDP forecasting: a support vector machines approach," Economics Bulletin, AccessEcon, vol. 33(2), pages 1101-1115.
  2. Knut Are Aastveit & Karsten R. Gerdrup & Anne Sofie Jore & Leif Anders Thorsrud, 2011. "Nowcasting GDP in Real-Time: A Density Combination Approach," Working Papers 0003, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  3. Jakub Ryšánek, 2010. "Combining VAR Forecast Densities Using Fast Fourier Transform," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(5), pages 72-88.
  4. Wolters, Maik Hendrik, 2012. "Evaluating point and density forecasts of DSGE models," IMFS Working Paper Series 59, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  5. Wolters, Maik H., 2011. "Forecasting under Model Uncertainty," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48723, Verein für Socialpolitik / German Economic Association.

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