<p><p>We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is 'improving' the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting. </p></p>
Authors
Research Associate University College London
Raffaella is a Professor in the Department of Economics at UCL and a Senior Economist at the Federal Reserve Bank of Chicago.
Giuseppe Ragusa
Report details
- Publisher
- CEPR
Suggested citation
Giacomini, R and Ragusa, G. (2011). Incorporating theoretical restrictions into forecasting by projection methods. London: CEPR. Available at: https://ifs.org.uk/publications/incorporating-theoretical-restrictions-forecasting-projection-methods (accessed: 28 March 2024).
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