Norges Bank

Working Paper

Combining forecast densities from VARs with uncertain instabilities

Author:
Anne Sofie Jore, James Mitchell and Shaun P. Vahey
Series:
Working Paper
Number:
1/2008

Abstract
Clark and McCracken (2008) argue that combining real-time point forecasts from VARs of output, prices and interest rates improves point forecast accuracy in the presence of uncertain model instabilities. In this paper, we generalize their approach to consider forecast density combinations and evaluations. Whereas Clark and McCracken (2008) show that the point forecast errors from particular equal-weight pairwise averages are typically comparable or better than benchmark univariate time series models, we show that neither approach produces accurate real-time forecast densities for recent US data. If greater weight is given to models that allow for the shifts in volatilities associated with the Great Moderation, predictive density
accuracy improves substantially.

 

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ISSN 1502-8190 (online)

Published 24 January 2008 10:50
Published 24 January 2008 10:50