Forecasting and conditional projection using realistic prior distributions (with discussion). (English) Zbl 0613.62142

Doan, Thomas; Litterman, Robert; Sims, Christopher

Econom. Rev. 3, 1-144 (1984).

This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to 10 macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variable responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates.
We provide unconditional forecasts as of 1982:12 and 1983:3. We also describe how a model such as this can be used to make conditional projections and to analyze policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. Although no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, information that may help in evaluating causal hypotheses without containing any such hypotheses.

MSC:

62P20	Applications of statistics to economics
62F15	Bayesian inference
62M20	Inference from stochastic processes and prediction
91B84	Economic time series analysis

Keywords:

forecasting; vector autoregressions; conditional projections; causal hypotheses