4.5 Article

Last Night a Shrinkage Saved My Life: Economic Growth, Model Uncertainty and Correlated Regressors

Journal

JOURNAL OF FORECASTING
Volume 34, Issue 2, Pages 133-144

Publisher

WILEY-BLACKWELL
DOI: 10.1002/for.2328

Keywords

model uncertainty; prediction; economic growth; Bayesian methods; correlated regressors

Funding

  1. Oesterreichische Nationalbank under the Jubilaumsfond grant [14663]

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We compare the predictive ability of Bayesian methods which deal simultaneously with model uncertainty and correlated regressors in the framework of cross-country growth regressions. In particular, we assess methods with spike and slab priors combined with different prior specifications for the slope parameters in the slab. Our results indicate that moving away from Gaussian g-priors towards Bayesian ridge, LASSO or elastic net specifications has clear advantages for prediction when dealing with datasets of (potentially highly) correlated regressors, a pervasive characteristic of the data used hitherto in the econometric literature. Copyright (C) 2015 John Wiley & Sons, Ltd.

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