Raffaella Giacomini and Giuseppe Ragusa, “Theory-coherent forecasting.” Journal of Econometrics, 182(1):145-155


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We consider a method for producing multivariate density forecasts that satisfy moment restrictions implied by economic theory, such as Euler conditions. The method starts from a base forecast that might not satisfy the theoretical restrictions and forces it to satisfy the moment conditions using exponential tilting. Although exponential tilting has been considered before in a Bayesian context (Robertson et al. 2005), our main contributions are: (1) to adapt the method to a classical inferential context with out-of-sample evaluation objectives and parameter estimation uncertainty; and (2) to formally discuss the conditions under which the method delivers improvements in forecast accuracy. An empirical illustration which incorporates Euler conditions into forecasts produced by Bayesian vector autoregressions shows that the improvements in accuracy can be sizable and significant.

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I teach economics at the University of Pisa (Department of Economics and Management).


Department of Economics and Management
University of Pisa
Via Cosimo Ridolfi 10
56124 Pisa (PI)


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