Bayesian VAR Forecasts, Survey Information and Structural Change in the Euro Area
65 Pages Posted: 24 Oct 2019
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Bayesian VAR Forecasts, Survey Information and Structural Change in the Euro Area
Date Written: October 2019
Abstract
We incorporate external information extracted from the European Central Bank's Survey of Professional Forecasters into the predictions of a Bayesian VAR, using entropic tilting and soft conditioning. The resulting conditional forecasts significantly improve the plain BVAR point and density forecasts. Importantly, we do not restrict the forecasts at a specific quarterly horizon, but their possible paths over several horizons jointly, as the survey information comes in the form of one- and two-year-ahead expectations. Besides improving the accuracy of the variable that we target, the spillover effects to "other-than-targeted'' variables are relevant in size and statistically significant. We document that the baseline BVAR exhibits an upward bias for GDP growth after the financial crisis and our results provide evidence that survey forecasts can help mitigate the effects of structural breaks on the forecasting performance of a popular macroeconometric model.
Keywords: Survey of Professional Forecasters, Density forecasts, Entropic tilting, Soft conditioning
JEL Classification: C53; C32; E37
Suggested Citation: Suggested Citation