Forecasting using mixed-frequency VARs with time-varying parameters

We extend the literature on economic forecasting by constructing a mixed-frequency time-varying parameter vector autoregression with stochastic volatility (MF-TVP-SVVAR). The latter is able to cope with structural changes and can handle indicators sampled at different frequencies. We conduct a real-time forecast exercise to predict US key macroeconomic variables and compare the predictions of the MF-TVP-SV-VAR with several linear, nonlinear, mixed-frequency, and quarterly-frequency VARs. Our key finding is that the MF-TVPSV-VAR delivers very accurate forecasts and, on average, outperforms its competitors. In particular, inflation forecasts benefit from this new forecasting approach. Finally, we assess the models’ performance during the Great Recession and find that the combination of stochastic volatility, time-varying parameters, and mixed-frequencies generates very precise inflation forecasts.