Forecasting Macroeconomic Variables Under Model Instability
41 Pages Posted: 9 May 2015
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Forecasting Macroeconomic Variables Under Model Instability
Forecasting Macroeconomic Variables Under Model Instability
Date Written: May 6, 2015
Abstract
We compare different approaches to accounting for parameter instability in the context of macroeconomic forecasting models that assume either small, frequent changes versus models whose parameters exhibit large, rare changes. An empirical out-of-sample forecasting exercise for U.S. GDP growth and inflation suggests that models that allow for parameter instability generate more accurate density forecasts than constant-parameter models although they fail to produce better point forecasts. Model combinations deliver similar gains in predictive performance although they fail to improve on the predictive accuracy of the single best model which is a specification that allows for time-varying parameters and stochastic volatility.
Keywords: Time-varying parameters, regime switching, change point models, stochastic volatility, GDP growth forecasts, inflation forecasts
JEL Classification: C22, C53
Suggested Citation: Suggested Citation