Norges Bank

Working Paper

Combining VAR and DSGE forecast densities

Author:
Ida Wolden Bache, Anne Sofie Jore, James Mitchell and Shaun P. Vahey
Series:
Working Paper
Number:
23/2009

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.

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ISSN 1502-8143 (online)

Published 30 November 2009 16:05
Published 30 November 2009 16:05