Macroeconomic forecasting in the euro area using predictive combinations of DSGE models

Abstract

We provide a comprehensive assessment of the predictive power of combinations of dynamic stochastic general equilibrium (DSGE) models for GDP growth, inflation, and the interest rate in the euro area. We employ a battery of static and dynamic pooling weights based on Bayesian model averaging principles, prediction pools, and dynamic factor representations, and entertain six different DSGE specifications and five prediction weighting schemes. Our results indicate that exploiting mixtures of DSGE models produces competitive forecasts compared to individual specifications for both point and density forecasts over the last three decades. Although these combinations do not tend to systematically achieve superior forecast performance, we find improvements for particular periods of time and variables when using prediction pooling, dynamic model averaging, and combinations of forecasts based on Bayesian predictive synthesis.