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Combining VAR and DSGE forecast densities

Ida Wolden Bache (), Anne Sofie Jore (), James Mitchell () and Shaun P. Vahey
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Ida Wolden Bache: Norges Bank
Anne Sofie Jore: Norges Bank

No 2009/23, Working Paper from Norges Bank

Abstract: A popular macroeconomic forecasting strategy takes combinations across 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 combine inflation forecast densities utilizing an ensemble system comprising many Vector Autoregressions (VARs), and a policymaking DSGE model. The DSGE receives substantial weight (for 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, and produces well-calibrated forecast densities for inflation.

Keywords: Ensemble modeling; Forecast densities; Forecast evaluation; VAR models; DSGE models (search for similar items in EconPapers)
JEL-codes: C32 C53 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-ets, nep-for and nep-mon
Date: 2009-11-05
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