Using Entropic Tilting to Combine BVAR Forecasts with External Nowcasts

41 Pages Posted: 24 Dec 2014

See all articles by Fabian Krueger

Fabian Krueger

Heidelberg Institute for Theoretical Studies (HITS) gGmbH

Todd E. Clark

Federal Reserve Bank of Cleveland

Francesco Ravazzolo

Free University of Bozen-Bolzano - Faculty of Economics and Management; BI Norwegian Business School

Date Written: December 22, 2014

Abstract

This paper shows entropic tilting to be a flexible and powerful tool for combining medium-term forecasts from BVARs with short-term forecasts from other sources (nowcasts from either surveys or other models). Tilting systematically improves the accuracy of both point and density forecasts, and tilting the BVAR forecasts based on nowcast means and variances yields slightly greater gains in density accuracy than does just tilting based on the nowcast means. Hence entropic tilting can offer — more so for persistent variables than not-persistent variables — some benefits for accurately estimating the uncertainty of multi-step forecasts that incorporate nowcast information.

Keywords: Forecasting, Prediction, Bayesian Analysis

JEL Classification: E17, C11, C53

Suggested Citation

Krueger, Fabian and Clark, Todd E. and Ravazzolo, Francesco, Using Entropic Tilting to Combine BVAR Forecasts with External Nowcasts (December 22, 2014). FRB of Cleveland Working Paper No. 14-39. Available at SSRN: https://ssrn.com/abstract=2541787 or http://dx.doi.org/10.2139/ssrn.2541787

Fabian Krueger

Heidelberg Institute for Theoretical Studies (HITS) gGmbH ( email )

Schloss-Wolfsbrunnenweg 35
Heidelberg, D-69118
Germany

Todd E. Clark (Contact Author)

Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States
216-579-2015 (Phone)

Francesco Ravazzolo

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: http://www.francescoravazzolo.com/

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