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A structural approach to combining external and DSGE model forecasts

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  • Drautzburg, Thorsten

Abstract

This note shows that combining external forecasts such as the Survey of Professional Forecasters can significantly increase DSGE forecast accuracy while preserving the interpretability in terms of structural shocks. Applied to pseudo real-time from 1997q2 onward, the canonical Smets and Wouters (2007) model has significantly smaller forecast errors when giving a high weight to the SPF forecasts. Incorporating the SPF forecast gives a larger role to risk premium shocks during the global financial crisis. A model with financial frictions favors a larger weight on the DSGE model forecast.

Suggested Citation

  • Drautzburg, Thorsten, 2024. "A structural approach to combining external and DSGE model forecasts," Economics Letters, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000223
    DOI: 10.1016/j.econlet.2024.111538
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    More about this item

    Keywords

    Forecasting; Model averaging; DSGE model; Judgmental forecasts;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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