Evaluating Real-Time VAR Forecasts with an Informative Democratic Prior
Jonathan H. Wright
Board of Governors of the Federal Reserve System - Trade and Financial Studies Section
May 19, 2010
FRB of Philadelphia Working Paper No. 10-19
This paper proposes Bayesian forecasting in a vector autoregression using a democratic prior. This prior is chosen to match the predictions of survey respondents. In particular, the unconditional mean for each series in the vector autoregression is centered around long-horizon survey forecasts. Heavy shrinkage toward the democratic prior is found to give good real-time predictions of a range of macroeconomic variables, as these survey projections are good at quickly capturing endpoint-shifts.
Number of Pages in PDF File: 33working papers series
Date posted: June 10, 2010
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