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Research Working Paper |
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Real-Time Density Forecasts from VARs with Stochastic Volatility By Todd E. Clark Abstract
Central banks and other forecasters are increasingly interested in
various aspects of density forecasts. However, recent sharp changes in
macroeconomic volatility – such as the Great Moderation and the more
recent sharp rise in volatility associated with greater variation in
energy prices and the deep global recession – pose significant
challenges to density forecasting. Accordingly, this paper examines,
with real-time data, density forecasts of U.S. GDP growth, unemployment,
inflation, and the federal funds rate from BVAR models with stochastic
volatility. The results indicate that adding stochastic volatility to
BVARs materially improves the real-time accuracy of density forecasts. |