Staff Reports
Economic Predictions with Big Data: The Illusion of Sparsity
Number 847
April 2018

JEL classification: C11, C53, C55

Authors: Domenico Giannone, Michele Lenza, and Giorgio E. Primiceri

We compare sparse and dense representations of predictive models in macroeconomics, microeconomics, and finance. To deal with a large number of possible predictors, we specify a prior that allows for both variable selection and shrinkage. The posterior distribution does not typically concentrate on a single sparse or dense model, but on a wide set of models. A clearer pattern of sparsity can only emerge when models of very low dimension are strongly favored a priori.

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Domenico Giannone
Domenico Giannone is a passive shareholder of now-casting Ltd, a web-based forecasting company.

Michele Lenza
I am an employee of the European Central Bank.

Giorgio E. Primiceri
I am a consultant for the Federal Reserve Bank of Chicago and for the European Central Bank.