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Incorporating theoretical restrictions into forecasting by projection methods

  • Raffaella Giacomini

    (University College London)

We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is "improving" the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_548.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 548.

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Date of creation: 2012
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Handle: RePEc:red:sed012:548
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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