Last Night a Shrinkage Saved My Life: Economic Growth, Model Uncertainty and Correlated Regressors. (1st February 2015)

• Record Type: Journal Article
• Authors: Hofmarcher, Paul; Crespo Cuaresma, Jesús; Grün, Bettina; Hornik, Kurt
• Is Part Of: Journal of forecasting. Volume 34:Number 2(2015:Mar.)
• Page Start: 133
• Page End: 144
• Publication Date: 2015-02-01
• Subjects: Forecasting -- Periodicals; Forecasting -- Mathematical models -- Periodicals; 003.2
• DOI: 10.1002/for.2328
• Languages: English
• ISSNs: 0277-6693

Abstract

<abstract abstract-type="main" id="for2328-abs-0001"> <title> <x xml:space="preserve">Abstract</x> </title> <p id="for2328-para-0005">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 <italic>spike and slab</italic> priors combined with different prior specifications for the slope parameters in the slab. Our results indicate that moving away from Gaussian <italic>g</italic>‐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 © 2015 John Wiley &amp; Sons, Ltd.</p> </abstract>