Chapter 3 Forecasting with Small Macroeconomic VARs in the Presence of Instabilities

Abstract

Small-scale VARs are widely used in macroeconomics for forecasting US output, prices, and interest rates. However, recent work suggests these models may exhibit instabilities. As such, a variety of estimation or forecasting methods might be used to improve their forecast accuracy. These include using different observation windows for estimation, intercept correction, time-varying parameters, break dating, Bayesian shrinkage, model averaging, etc. This paper compares the effectiveness of such methods in real-time forecasting. We use forecasts from univariate time series models, the Survey of Professional Forecasters, and the Federal Reserve Board's Greenbook as benchmarks.

Citation

Clark, T.E. and McCracken, M.W. (2008), "Chapter 3 Forecasting with Small Macroeconomic VARs in the Presence of Instabilities", Rapach, D.E. and Wohar, M.E. (Ed.) Forecasting in the Presence of Structural Breaks and Model Uncertainty (Frontiers of Economics and Globalization, Vol. 3), Emerald Group Publishing Limited, Leeds, pp. 93-147. https://doi.org/10.1016/S1574-8715(07)00203-5