MACROECONOMIC FORECASTING AND STRUCTURAL CHANGES IN STEADY STATES
Dimitrios P. Louzis
Bank of Greece
Abstract
This article proposes methods for estimating a Bayesian vector autoregression (VAR) model with an informative steady state prior which also accounts for possible structural changes in the long-term trend of the macroeconomic variables. I show that, overall, the proposed time-varying steady state VAR model can lead to superior point and density macroeconomic forecasting compared to constant steady state VAR specifications.
JEL classification numbers: C32
Keywords: Steady states; time-varying parameters; macroeconomic forecasting
Acknowledgement: The author would like to thank Heather Gibson for her constructive comments and suggestions. The views expressed in this article do not necessarily represent those of the Bank of Greece.
Correspondence:
Dimitrios P. Louzis
Bank of Greece
Economic Analysis and Research Department
21 E.Venizelos Avenue,
GR 10250, Athens, Greece
e-mail: dlouzis@bankofgreece.gr; dlouzis@aueb.gr