Volume 42, Issue 2 pp. 418-451
RESEARCH ARTICLE

Real-time forecasting of the Australian macroeconomy using flexible Bayesian VARs

Chenghan Hou

Chenghan Hou

Center for Economics, Finance and Management Studies, Hunan University, Changsha, China

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Bao Nguyen

Bao Nguyen

Tasmanian School of Business and Economics, University of Tasmania and Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Canberra, Australian Capital Territory, Australia

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Bo Zhang

Corresponding Author

Bo Zhang

Business School, Wenzhou University, Wenzhou, China

Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Canberra, Australian Capital Territory, Australia

Correspondence

Bo Zhang, Business School, Wenzhou University, Wenzhou, Zhejiang 325035 China.

Email: [email protected]

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First published: 28 September 2022
Citations: 1

Funding information: Chenghan Hou would like to acknowledge financial support by the National Natural Science Foundation of China (72003064). Bo Zhang would like to acknowledge financial support by the National Natural Science Foundation of China (72250410372) and the 2022 Philosophy and Social Sciences Research Program of Wenzhou (Project Number 22wsk016).

Abstract

This paper evaluates the real-time forecast performance of alternative Bayesian autoregressive (AR) and vector autoregressive (VAR) models for the Australian macroeconomy. To this end, we construct an updated vintage database and compare the predictive ability of a wide set of specifications that takes into account almost all possible combinations of nonstandard errors existing in the current literature. In general, we find that the models with flexible covariance structures can improve the forecast accuracy as compared with the standard variant. For forecasting GDP, both point and density forecasts consistently suggest small VARs tend to outperform their counterparts while AR models often predict inflation better. With the unemployment rate, large VAR models provide superior forecasts to the alternatives at almost all forecast horizons. The forecasting performance of these models slightly changes when we consider the first, second, and latest-available vintage as actual values, highlighting the importance of using real-time data vintages in forecasting.

DATA AVAILABILITY STATEMENT

These data were derived from the following resources available in the public domain: https://fbe.unimelb.edu.au/economics/macrocentre/artmdatabase#databases-and-documentation; https://www.abs.gov.au/ https://www.rba.gov.au/.

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