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Forecasting using mixed-frequency VARs with time-varying parameters

Author

Listed:
  • Markus Heinrich
  • Magnus Reif
Abstract
We extend the literature on economic forecasting by constructing a mixed-frequency time-varying parameter vector autoregression with stochastic volatility (MF-TVP-SVVAR). The latter is able to cope with structural changes and can handle indicators sampled at different frequencies. We conduct a real-time forecast exercise to predict US key macroeconomic variables and compare the predictions of the MF-TVP-SV-VAR with several linear, nonlinear, mixed-frequency, and quarterly-frequency VARs. Our key finding is that the MF-TVPSV-VAR delivers very accurate forecasts and, on average, outperforms its competitors. In particular, inflation forecasts benefit from this new forecasting approach. Finally, we assess the models’ performance during the Great Recession and find that the combination of stochastic volatility, time-varying parameters, and mixed-frequencies generates very precise inflation forecasts.

Suggested Citation

  • Markus Heinrich & Magnus Reif, 2018. "Forecasting using mixed-frequency VARs with time-varying parameters," ifo Working Paper Series 273, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:ifowps:_273
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    2. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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