Economics at your fingertips  

An interpretable machine learning workflow with an application to economic forecasting

Marcus Buckmann () and Andreas Joseph ()
Additional contact information
Marcus Buckmann: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Andreas Joseph: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 984, Bank of England working papers from Bank of England

Abstract: We propose a generic workflow for the use of machine learning models to inform decision making and to communicate modelling results with stakeholders. It involves three steps: (1) a comparative model evaluation, (2) a feature importance analysis and (3) statistical inference based on Shapley value decompositions. We discuss the different steps of the workflow in detail and demonstrate each by forecasting changes in US unemployment one year ahead using the well-established FRED-MD dataset. We find that universal function approximators from the machine learning literature, including gradient boosting and artificial neural networks, outperform more conventional linear models. This better performance is associated with greater flexibility, allowing the machine learning models to account for time-varying and nonlinear relationships in the data generating process. The Shapley value decomposition identifies economically meaningful nonlinearities learned by the models. Shapley regressions for statistical inference on machine learning models enable us to assess and communicate variable importance akin to conventional econometric approaches. While we also explore high-dimensional models, our findings suggest that the best trade-off between interpretability and performance of the models is achieved when a small set of variables is selected by domain experts.

Keywords: machine learning; model interpretability; forecasting; unemployment; Shapley values (search for similar items in EconPapers)
JEL-codes: C14 C38 C45 C52 C53 C71 E24 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-06-01
New Economics Papers: this item is included in nep-big, nep-cmp and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) ... omic-forecasting.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().

Page updated 2023-01-31
Handle: RePEc:boe:boeewp:0984