Forecasting with dynamics models using shrinkage-based estimation

The paper provides a proof of consistency of the ridge estimator for regressions where the number of regressors tends to infinity. Such result is obtained without assuming a factor structure. A Monte Carlo study suggests that shrinkage autoregressive models can lead to very substantial advantages compared to standard autoregressive models. An empirical application focusing on forecasting inflation and GDP growth in a panel of countries confirms this finding. -- Shrinkage ; Forecasting