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Working Paper
Macroeconomic Forecasting in a Multi-country Context
In this paper we propose a hierarchical shrinkage approach for multi-country VAR models. In implementation, we consider three different scale mixtures of Normals priors — specifically, Horseshoe, Normal- Gamma, and Normal-Gamma-Gamma priors. We provide new theoretical results for the Normal-Gamma prior. Empirically, we use a quarterly data set for the G7 economies to examine how model specifications and prior choices affect the forecasting performance for GDP growth, inflation, and a short-term interest rate. We find that hierarchical shrinkage, particularly as implemented with the ...