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Bayesian nonparametric methods for macroeconomic forecasting

Author

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  • Massimiliano MARCELLINO
  • Michael PFARRHOFER

Abstract

We review specification and estimation of multivariate Bayesian nonparametric models for forecasting (possibly large sets of) macroeconomic and financial variables. The focus is on Bayesian Additive Regression Trees and Gaussian Processes. We then apply various versions of these models for point, density and tail forecasting using datasets for the euro area and the US. The performance is compared with that of several variants of Bayesian VARs to assess the relevance of accounting for general forms of nonlinearities. We find that medium-scale linear VARs with stochastic volatility are tough benchmarks to beat. Some gains in predictive accuracy arise for nonparametric approaches, most notably for short-run forecasts of unemployment and longer-run predictions of inflation, and during recessionary or otherwise non-standard economic episodes

Suggested Citation

  • Massimiliano MARCELLINO & Michael PFARRHOFER, 2024. "Bayesian nonparametric methods for macroeconomic forecasting," BAFFI CAREFIN Working Papers 24224, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:baf:cbafwp:cbafwp24224
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    More about this item

    Keywords

    United States; euro area; Bayesian Additive Regression Trees; Gaussian Processes; multivariate time series analysis; structural breaks;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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