Density Forecast Combination

In this paper we investigate whether and how far density forecasts sensibly can be combined to produce a “better” pooled density forecast. In so doing we bring together two important but hitherto largely unrelated areas of the forecasting literature in economics, density forecasting and forecast combination. We provide simple Bayesian methods of pooling information across alternative density forecasts. We illustrate the proposed techniques in an application to two widely used published density forecasts for U.K. inflation. We examine whether in practice improved density forecasts for inflation, one year ahead, might have been obtained if one had combined the Bank of England and NIESR density forecasts or “fan charts”.