Forecasting the Swiss Economy Using VECX* Models: An Exercise in Forecast Combination Across Modelsand Observation Windows

Katrin Assenmacher-Wesche and M. Hashem Pesaran

Issue
2008-03

Pages
44

JEL classification
C53, C32

Keywords
Bayesian model averaging, choice of observation window, long-run structural vector autoregression

Year
2008

This paper uses vector error correction models of Switzerland for forecasting output, inflation and the short-term interest rate. It considers three different ways of dealing with forecast uncertainties. First, it investigates the effect on forecasting performance of averaging over forecasts from different models. Second, it considers averaging forecasts from different estimation windows. It is found that averaging over estimation windows is at least as effective as averaging over different models and both complement each other. Third, it examines whether using weighting schemes from the machine learning literature improves the average forecast. Compared to equal weights the effect of alternative weighting schemes on forecast accuracy is small in the present application.