Forecasting in Nonstationary Environments: What Works and What Doesn't in Reduced-Form and Structural Models

Authors: Raffaella Giacomini and Barbara Rossi

Annual Review of Economics, Vol. 7, No 1, 207--229, January, 2015

This review provides an overview of forecasting methods that can help researchers forecast in the presence of nonstationarities caused by instabilities. The emphasis of the review is both theoretical and applied, and we provide several examples of interest to economists. We show that modeling instabilities can help, but it depends on how they are modeled. We also demonstrate how to robustify a model against instabilities.

This paper originally appeared as Barcelona GSE Working Paper 819