Forecasting with FAVAR: Macroeconomic versus Financial Factors

We assess the predictive power of macroeconomic and financial latent factorson the key variables for the US economy before and after the recent Great Re-cession. We implement a forecasting horserace among Factor Augmented... [ view full abstract ]

We assess the predictive power of macroeconomic and financial latent factors

on the key variables for the US economy before and after the recent Great Re-

cession. We implement a forecasting horserace among Factor Augmented VAR

(FAVAR), Classical, and Bayesian VAR models.

FAVAR models outperform others. Focusing only on macroeconomic or on

financial latent factors, we find how the financial variables have not a driver role

in forecasting the US economy including the Great Recession.