Combining Bayesian VARs with Survey Density Forecasts: Does it Pay Off?

57 Pages Posted: 4 May 2021

See all articles by Marta Banbura

Marta Banbura

European Central Bank

Federica Brenna

KU Leuven - Department of Economics

Joan Paredes

European Central Bank

Francesco Ravazzolo

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

Date Written: May 1, 2021

Abstract

This paper studies how to combine real-time forecasts from a broad range of Bayesian vector autoregression (BVAR) specifications and survey forecasts by optimally exploiting their properties. To do that, it compares the forecasting performance of optimal pooling and tilting techniques, including survey forecasts for predicting euro area inflation and GDP growth at medium-term forecast horizons using both univariate and multivariate forecasting metrics. Results show that the Survey of Professional Forecasters (SPF) provides good point forecast performance, but also that SPF forecasts perform poorly in terms of densities for all variables and horizons. Accordingly, when the model combination or the individual models are tilted to SPF's first moments, point accuracy and calibration improve, whereas they worsen when SPF's second moments are included. We conclude that judgement incorporated in survey forecasts can considerably increase model forecasts accuracy, however, the way and the extent to which it is incorporated matters.

JEL Classification: C11, C32, C53, E27, E37

Suggested Citation

Banbura, Marta and Brenna, Federica and Paredes, Joan and Ravazzolo, Francesco, Combining Bayesian VARs with Survey Density Forecasts: Does it Pay Off? (May 1, 2021). ECB Working Paper No. 2021/2543, Available at SSRN: https://ssrn.com/abstract=3838719

Marta Banbura (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Federica Brenna

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Joan Paredes

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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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