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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Forecasting with small macroeconomic VARs in the presence of instabilities
Todd E. Clark
Michael W. McCracken
Abstract

Small-scale VARs are widely used in macroeconomics for forecasting U.S. 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.


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Todd E. Clark & Michael W. McCracken, Forecasting with small macroeconomic VARs in the presence of instabilities, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2007-41, 2007.
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Keywords: Economic forecasting ; Real-time data ; Econometric models
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