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On the predictability of time-varying VAR and DSGE models

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  • Stelios Bekiros

    ()

  • Alessia Paccagnini

    ()

Abstract

Over the last few years, there has been a growing interest in DSGE modelling for predicting macroeconomic fluctuations and conducting quantitative policy analysis. Hybrid DSGE models have become popular for dealing with some of the DSGE misspecifications as they are able to solve the trade-off between theoretical coherence and empirical fit. However, these models are still linear and they do not consider time variation for parameters. The time-varying properties in VAR or DSGE models capture the inherent nonlinearities and the adaptive underlying structure of the economy in a robust manner. In this article, we present a state-space time-varying parameter VAR model. Moreover, we focus on the DSGE–VAR that combines a microfounded DSGE model with the flexibility of a VAR framework. All the aforementioned models as well simple DSGEs and Bayesian VARs are used in a comparative investigation of their out-of-sample predictive performance regarding the US economy. The results indicate that while in general the classical VAR and BVARs provide with good forecasting results, in many cases the TVP–VAR and the DSGE–VAR outperform the other models. Copyright Springer-Verlag 2013

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 45 (2013)
Issue (Month): 1 (August)
Pages: 635-664

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Handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:635-664

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Related research

Keywords: Hybrid DSGE; Time-varying VAR; Kalman filter; Bayesian VAR; Forecasting; C11; C15; C32;

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References

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Cited by:
  1. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.
  2. Mehmet Balcilar & Rangan Gupta & Anandamayee Majumdar & Stephen M. Miller, 2012. "Was the Recent Downturn in US GDP Predictable?," Working Papers 201230, University of Pretoria, Department of Economics.

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