Combining VAR and DSGE forecast densities

Ida Wolden Bache, Anne Sofie Jore, James Mitchell and Shaun Vahey

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 10, 1659-1670

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.

Keywords: Ensemble; modeling; Forecast; densities; Forecast; evaluation; VAR; models; DSGE; models (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (30)

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Working Paper: Combining VAR and DSGE forecast densities (2009)
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