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Macroeconomic Forecasting and Structural Change

  • D'Agostino, Antonello

    (Central Bank and Financial Services Authority of Ireland)

  • Gambetti, Luca

    (Universitat Autonoma de Barcelona)

  • Giannone, Domenico

    (ECARES, Université Libre de Bruxelles)

  • Giannone, Domenico

The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coefficients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TVVAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the na¨ýve random walk model. These results are also shown to hold over the most recent period in which it has been hard to forecast inflation.

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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 8/RT/09.

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Length: 29 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:cbi:wpaper:8/rt/09
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  1. D’Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2006. "(Un)Predictability and macroeconomic stability," Working Paper Series 0605, European Central Bank.
  2. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, . "Explaining the great moderation: it is not the shocks," ULB Institutional Repository 2013/6413, ULB -- Universite Libre de Bruxelles.
  3. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
  4. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
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  6. Barro, Robert J., 1987. "Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701-1918," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 221-247, September.
  7. Todd E. Clark & Michael W. McCracken, 2007. "Forecasting with small macroeconomic VARs in the presence of instabilities," Finance and Economics Discussion Series 2007-41, Board of Governors of the Federal Reserve System (U.S.).
  8. Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2008. "Inflation-Gap Persistence in the U.S," NBER Working Papers 13749, National Bureau of Economic Research, Inc.
  9. Douglas Staiger & James H. Stock & Mark W. Watson, 2001. "Prices, Wages and the U.S. NAIRU in the 1990s," NBER Working Papers 8320, National Bureau of Economic Research, Inc.
  10. Cogley, Timothy W. & Morozov, Sergei & Sargent, Thomas J., 2003. "Bayesian fan charts for UK inflation: Forecasting and sources of uncertainty in an evolving monetary system," CFS Working Paper Series 2003/44, Center for Financial Studies (CFS).
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  12. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  13. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
  14. Canova, Fabio, 2007. "G-7 Inflation Forecasts: Random Walk, Phillips Curve Or What Else?," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 1-30, February.
  15. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
  16. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
  17. Todd E. Clark & Michael W. McCracken, 2006. "Forecasting of small macroeconomic VARs in the presence of instabilities," Research Working Paper RWP 06-09, Federal Reserve Bank of Kansas City.
  18. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  19. Barbara Rossi & Tatevik Sekhposyan, 2010. "Has Models' Forecasting Performance for US Output Growth and Inflation Changed over Time, and When?," Working Papers 10-16, Duke University, Department of Economics.
  20. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
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