Working Paper

On Model Aggregation and Forecast Combination

Abstract: Policy makers express their views and decisions via the lens of a particular model or theory. But since any model is a highly stylized representation of the unknowable object of interest, all these models are inherently misspecified, and the resulting ambiguity injects uncertainty in the decision-making process. We argue that entropy-based aggregation is a convenient device to confront this uncertainty and summarize relevant information from a set of candidate models and forecasts. The proposed aggregation tends to robustify the decision-making process to various sources of risks and uncertainty. We find compelling evidence for the advantages of entropy-based aggregation for forecasting inflation.

JEL Classification: C52; C53; E37; G11;

https://doi.org/10.29338/wp2025-12

Status: Published in 2025

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2025-10-09

Number: 2025-12