Does economic policy uncertainty forecast real housing returns in a panel of OECD countries? A Bayesian approach

This paper investigates whether the news-based measure of economic policy uncertainty (EPU) could help in forecasting the real housing returns in ten (Canada, France, Germany, Italy, Japan, The Netherlands, South Korea, Spain, United Kingdom, and United States of America) Organization for Economic Co-operation and Development (OECD) countries. We analyze the quarterly out-of-sample period of 2008:Q2-2014:Q4, given an in-sample period of 2003:Q1-2008:1Q1, using time series and panel data-based Vector Autoregressive models, with the latter allowing for heterogeneity, and static and dynamic interdependence. It is found that regardless of the forecasting model considered, EPU is useful for forecasting real housing returns. Our results show that, panel data models, especially the Bayesian variants which allow for parameter shrinkage, consistently beat time series autoregressive models suggesting the importance of pooling information when trying to forecast real housing returns.