New forecasting model accurately predicts inflation, unemployment, and interest rates.
The paper examines if including changes in the economy's structure improves predictions of inflation, unemployment, and interest rates. By using a Time-Varying Coefficients VAR with Stochastic Volatility model, the researchers accurately forecasted these variables. The model performed best for predicting inflation compared to other models like fixed coefficients VARs and Time-Varying ARs. These findings were consistent even during recent periods when forecasting inflation was challenging.