Forecasting with DSGE Models: The Role of Nonlinearities
AbstractThis paper studies whether the out-of-sample forecasting performance of a dynamic stochastic general equilibrium (DSGE) model improves by taking its nonlinear rather than its linear approximation to the data. We address this question within a New Keynesian monetary economy, considering both environments of simulated and real data. Precisely, we estimate our model based on its linear respectively quadratic approximate solution, generate out-of-sample forecasts for three observables (output, inflation, and the nominal interest rate), and compare the quality of forecasts by several statistical measures of accuracy. We find that the value of nonlinearities in terms of predictive power depends crucially on whether the model is well specified. For simulated data, the nonlinear model indeed forecasts noticeably better as compared to its linearized counterpart, whereas for real data, we find no substantial differences in predictive abilities.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): 8 (2008)
Issue (Month): 1 (July)
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Web page: http://www.degruyter.com
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- Mehmet Balcilar & Rangan Gupta & Anandamayee Majumdar & Stephen M. Miller, 2012.
"Was the Recent Downturn in US GDP Predictable?,"
201230, University of Pretoria, Department of Economics.
- Mehmet Balcilar & Rangan Gupta & Anandamayee Majumdar & Stephen M. Miller, 2012. "Was the Recent Downturn in US GDP Predictable?," Working Papers 1210, University of Nevada, Las Vegas , Department of Economics.
- Mehmet Balcilar & Rangan Gupta & Anandamayee Majumdar & Stephen M. Miller, 2012. "Was the Recent Downturn in US GDP Predictable?," Working papers 2012-38, University of Connecticut, Department of Economics, revised Dec 2013.
- Mehmet Balcilar & Rangan Gupta & Kevin Kotze, 2013. "Forecasting South African Macroeconomic Data with a Nonlinear DSGE Model," Working Papers 201313, University of Pretoria, Department of Economics.
- Rangan Gupta & Rudi Steinbach, 2010. "Forecasting Key Macroeconomic Variables of the South African Economy: A Small Open Economy New Keynesian DSGE-VAR Model," Working Papers 201019, University of Pretoria, Department of Economics.
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