Incorporating regional wage relations in local forecasting models with a Bayesian prior

A Bayesian vector autoregressive technique is used to incorporate intercity wage relations into a local model wage formation. This technique requires that a simple prior distribution be specified for the likely values of the coefficients for the variables that represent the intercity relations. The Bayesian model provides out-of-sample forecasts superior to those from both unconstrained vector autoregressive and univariate autoregressive models. This suggests that intercity linkages provide useful information that can be effectively incorporated in local forecasting models.