Article ID: | iaor2016941 |
Volume: | 35 |
Issue: | 3 |
Start Page Number: | 250 |
End Page Number: | 262 |
Publication Date: | Apr 2016 |
Journal: | Journal of Forecasting |
Authors: | Shi Jianmin |
Keywords: | forecasting: applications, statistics: empirical, time series: forecasting methods |
Model uncertainty and recurrent or cyclical structural changes in macroeconomic time series dynamics are substantial challenges to macroeconomic forecasting. This paper discusses a macro variable forecasting methodology that combines model uncertainty and regime switching simultaneously. The proposed predictive regression specification permits both regime switching of the regression parameters and uncertainty about the inclusion of forecasting variables by employing Bayesian model averaging. In an empirical exercise involving quarterly US inflation, we observed that our Bayesian model averaging with regime switching leads to substantial improvements in forecast performance, particularly in the medium horizon (two to four quarters).