Wolden Bache, Ida, Sofie Jore, Anne, Mitchell, James and Vahey, Shaun P. (2011) Combining VAR and DSGE forecast densities. Journal of Economic Dynamics and Control, Vol.35 (No.10). pp. 1659-1670. doi:10.1016/j.jedc.2011.04.006 ISSN 0165-1889.

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Abstract

A popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions (VARs) and a policymaking DSGE model. The DSGE receives a substantial weight in the pool (at short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, but produces well-calibrated forecast densities for inflation.

Item Type:	Journal Article
Divisions:	Faculty of Social Sciences > Warwick Business School > Global Energy Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of Economic Dynamics and Control
Publisher:	Elsevier BV
ISSN:	0165-1889
Official Date:	2011
Dates:	Date Event 2011 Published
Volume:	Vol.35
Number:	No.10
Page Range:	pp. 1659-1670
DOI:	10.1016/j.jedc.2011.04.006
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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