Causal Machine Learning for Macroeconomic Forecasting Under Structural Breaks and Economic Uncertainty
TL;DR
An integrated causal machine learning framework designed to improve macroeconomic forecasting performance under structural instability and uncertainty is proposed, demonstrating that causal machine learning models significantly outperform conventional econometric frameworks such as VAR and TVP-VAR models, as well as standard machine learning algorithms including Random Forest, XGBoost, and LSTM networks.
Abstract
Macroeconomic forecasting has become increasingly challenging in environments characterized by structural breaks, nonlinear dynamics, and elevated economic uncertainty. Traditional econometric forecasting models frequently experience substantial predictive deterioration during periods of financial crises, geopolitical instability, and rapidly evolving macroeconomic conditions due to their reliance on assumptions of parameter stability and linear economic relationships. In response to these limitations, this study proposes an integrated causal machine learning framework designed to improve macroeconomic forecasting performance under structural instability and uncertainty. The proposed framework combines structural break detection techniques, machine learning algorithms, causal inference methodologies, and Explainable Artificial Intelligence (XAI) tools within a unified empirical architecture. More specifically, the study integrates Bai–Perron structural break analysis, Markov-Switching regime identification, Double Machine Learning (DML), Causal Forest estimation procedures, and SHAP-based explainability techniques. The empirical analysis employs a U.S. macroeconomic time-series dataset covering major crisis episodes, including the 2008 Global Financial Crisis, the COVID-19 pandemic, and the 2022 inflation shock. The dataset combines inflation, monetary, financial, energy-market, and uncertainty indicators obtained from publicly available U.S. macroeconomic databases. The empirical findings demonstrate that causal machine learning models significantly outperform conventional econometric frameworks such as VAR and TVP-VAR models, as well as standard machine learning algorithms including Random Forest (RF), XGBoost, and LSTM networks. The Double Machine Learning framework generates the strongest forecasting performance across all forecasting horizons, economic regimes, and robustness specifications. The results further reveal that macroeconomic relationships are highly regime-dependent and strongly influenced by uncertainty indicators, financial volatility, oil price shocks, and monetary policy dynamics. Explainability analysis additionally shows that uncertainty measures and energy market variables become dominant drivers of inflation forecasts during crisis periods characterized by elevated instability. The study contributes to the growing literature on macroeconomic forecasting by bridging econometric forecasting theory, causal inference methodologies, machine learning techniques, and explainable artificial intelligence within a unified forecasting framework. The findings provide important implications for central banks, policymakers, and financial institutions seeking more adaptive, transparent, and robust forecasting systems under uncertain macroeconomic environments.