Forecasting with Structural Models and VARs: Relative Advantages and the Client Connection

With this article, Foresight introduces a new section of methods tutorials. Our intention is to provide a broad overview of a method for those who are not currently specialists in that particular area, and possibly to stimulate new thinking about the proper use and goals of the methodology. Since the early 1980s, structural (“econometric”) models and vector autoregressions (VARs) have been competing forecasting techniques. The structural approach has been widely used since the 1950s by macroeconomic forecasters. The VAR approach was forcefully advocated for macroeconomic forecastuse by Christopher Sims in his 1980 Econometrica article. In our first Foresight tutorial, Dan Hamilton describes the two techniques and discusses what each implies for the client connection. Certain aspects of the discussion are oriented to macroeconomic forecasting, but the main conclusions of the article apply to any forecast setting. Copyright International Institute of Forecasters, 2011