Dynamic prediction pools: An investigation of financial frictions and forecasting performance

Marco Del Negro, Raiden B. Hasegawa and Frank Schorfheide

Journal of Econometrics, 2016, vol. 192, issue 2, 391-405

Abstract: We apply a novel methodology for estimating time-varying weights in linear prediction pools, which we call Dynamic Pools, and use it to investigate the relative forecasting performance of DSGE models with and without financial frictions for output growth and inflation from 1992 to 2011. We find strong evidence of time variation in the pool’s weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but does not perform as well in tranquil periods. The dynamic pool’s weights react in a timely fashion to changes in the environment, leading to real-time forecast improvements relative to other methods of density forecast combination, such as equal-weights combination, Bayesian model averaging, optimal static pools, and dynamic model averaging. We show how a policymaker dealing with model uncertainty could have used a dynamic pool to perform a counterfactual exercise (responding to the gap in labor market conditions) in the immediate aftermath of the Lehman crisis.

Keywords: Bayesian estimation; DSGE models; Financial frictions; Forecasting; Great Recession; Linear prediction pools (search for similar items in EconPapers)
JEL-codes: C53 E31 E32 E37 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (123)

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Related works:
Working Paper: Dynamic prediction pools: an investigation of financial frictions and forecasting performance (2014)
Working Paper: Dynamic Prediction Pools: An Investigation of Financial Frictions and Forecasting Performance (2014)
Working Paper: Dynamic Prediction Pools: An Investigation of Financial Frictions and Forecasting Performance (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:192:y:2016:i:2:p:391-405

DOI: 10.1016/j.jeconom.2016.02.006

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