The Model Confidence Set

This paper introduces the model confidence set (MCS) and applies it to the selection of models. An MCS is a set of models that is constructed so that it will contain the best model with a given level of confidence. The MCS is in this sense analogous to a confidence interval for a parameter. The MCS acknowledges the limitations of the data; uninformative data yield an MCS with many models whereas informative data yield an MCS with only a few models. The MCS procedure does not assume that a particular model is the true model; in fact, the MCS procedure can be used to compare more general objects, beyond the comparison of models. We apply the MCS procedure to two empirical problems. First, we revisit the inflation forecasting problem posed by Stock and Watson (1999) and compute the MCS for their set of inflation forecasts. Second, we compare a number of Taylor rule regressions and determine the MCS of the best in terms of in-sample likelihood criteria