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Density forecasting with Bayesian Vector Autoregressive models under macroeconomic data uncertainty

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  • Michael P. Clements
  • Ana Beatriz Galvão

Abstract

Macroeconomic data are subject to data revisions. Yet, the usual way of generating real‐time density forecasts from Bayesian Vector Autoregressive (BVAR) models makes no allowance for data uncertainty from future data revisions. We develop methods of allowing for data uncertainty when forecasting with BVAR models with stochastic volatility. First, the BVAR forecasting model is estimated on real‐time vintages. Second, the BVAR model is jointly estimated with a model of data revisions such that forecasts are conditioned on estimates of the ‘true’ values. We find that this second method generally improves upon conventional practice for density forecasting, especially for the United States.

Suggested Citation

  • Michael P. Clements & Ana Beatriz Galvão, 2023. "Density forecasting with Bayesian Vector Autoregressive models under macroeconomic data uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 164-185, March.
    • Handle: RePEc:wly:japmet:v:38:y:2023:i:2:p:164-185
    DOI: 10.1002/jae.2944
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    References listed on IDEAS

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