Macroeconomic forecasting and structural change
Article first published online: 14 JUL 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 28, Issue 1, pages 82–101, January/February 2013
How to Cite
D'Agostino, A., Gambetti, L. and Giannone, D. (2013), Macroeconomic forecasting and structural change. J. Appl. Econ., 28: 82–101. doi: 10.1002/jae.1257
- Issue published online: 21 JAN 2013
- Article first published online: 14 JUL 2011
- Manuscript Revised: 24 MAR 2011
- Manuscript Received: 13 NOV 2009
The aim of this paper is to assess whether modeling structural change can help improving the accuracy of macroeconomic forecasts. We conduct a simulated real-time out-of-sample exercise using a time-varying coefficients vector autoregression (VAR) with stochastic volatility to predict the inflation rate, unemployment rate and interest rate in the USA. The model generates accurate predictions for the three variables. In particular, the forecasts of inflation are much more accurate than those obtained with any other competing model, including fixed coefficients VARs, time-varying autoregressions and the naïve random walk model. The results hold true also after the mid 1980s, a period in which forecasting inflation was particularly hard. Copyright © 2011 John Wiley & Sons, Ltd.