Forecasting cointegrated series with BVAR models

In this paper we examine how BVARs can be used for forecasting cointegrated variables. We propose an approach based on a Bayesian ECM model in which, contrary to the previous literature, the factor loadings are given informative priors. This procedure, applied to Italian macroeconomic series, produces more satisfactory forecasts than different prior specifications or parameterizations. Providing an informative prior on the factor loadings is a crucial point: a flat prior on the ECM terms combined with an informative prior on the lagged endogenous variables coefficients gives too much importance to the long‐run properties with respect to the short‐run dynamics. Copyright © 1999 John Wiley & Sons, Ltd.