Forecasting the Swiss Economy Using VECX* Models: An Exercise in Forecast Combination Across Models and Observation Windows
Katrin Assenmacher and M. Hashem Pesaran
Bayesian model averaging, choice of observation window, long-run structural vector autoregression
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.