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Forecasting with a Bayesian DSGE Model: An Application to the Euro Area

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Author Info
Smets, Frank
Wouters, Rafael

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Abstract

In monetary policy strategies geared towards maintaining price stability, conditional and unconditional forecasts of inflation and output play an important role. In this Paper we illustrate how modern sticky-price dynamic stochastic general equilibrium (DSGE) models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with atheoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4749.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4749

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Keywords: DSGE models euro area forecasting monetary policy

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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References listed on IDEAS
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  1. Eric M. Leeper & Tao Zha, 2002. "Modest Policy Interventions," NBER Working Papers 9192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
    Other versions:
  4. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
    Other versions:
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  7. G. Peersman, 2004. "What caused the early millennium slowdown? Evidence based on vector autoregressions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/235, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
  8. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2003-1), pages 235-322. [Downloadable!]
    Other versions:
  9. Timothy Cogley & Sergei Morozov & Thomas J. Sargent, 2003. "Bayesian Fan Charts for U.K. Inflation: Forecasting and Sources of Uncertainty in an Evolving Monetary System," CFS Working Paper Series 2003/44, Center for Financial Studies. [Downloadable!]
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  10. repec:att:wimass:1920315 is not listed on IDEAS
  11. Lutz Kilian & Simone Manganelli, 2003. "The Central Bank as a risk manager: quantifying and forecasting fnflation risks," Working Paper Series 226, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Lombardi & Silvia Sgherri, 2007. "(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate," DNB Working Papers 142, Netherlands Central Bank, Research Department. [Downloadable!]
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  2. Marco Del Negro & Frank Schorfheide, 2004. "A DSGE-VAR for the Euro Area," Computing in Economics and Finance 2004 79, Society for Computational Economics. [Downloadable!]
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  3. Frédéric Lagneaux, 2005. "Importance économique du Port Autonome de Liège: rapport 2003," Documents series 200510-1, National Bank of Belgium. [Downloadable!]
  4. Ozge Senay, 2007. " Interest Rate Rules and Welfare in Open Economies," CDMA Working Paper Series 0715, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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  5. Österholm, Pär, 2006. "Incorporating Judgement in Fan Charts," Working Paper Series 2006:30, Uppsala University, Department of Economics. [Downloadable!]
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  6. Janet Mitchell, 2005. "Financial intermediation theory and implications for the sources of value in structured finance markets," Documents series 200507-1, National Bank of Belgium. [Downloadable!]
  7. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," Working Paper Series 203, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  8. Johan Devriese & Janet Mitchell, 2005. "Liquidity risk in securities settlement," Research series 200507-2, National Bank of Belgium. [Downloadable!]
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  9. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Macroeconomics 0510022, EconWPA. [Downloadable!]
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  10. Frédéric Lagneaux, 2004. "Importance économique du Port Autonome de Liège: rapport 2002," Documents series 200411-3, National Bank of Belgium. [Downloadable!]
  11. Peter Welz, 2006. "Assessing predetermined expectations in the standard sticky-price model - a Bayesian approach," Working Paper Series 621, European Central Bank. [Downloadable!]
  12. Fabio Milani, 2005. "A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?," Working Papers 060703, University of California-Irvine, Department of Economics. [Downloadable!]
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  13. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2005. "Forecasting Canadian Time Series with the New-Keynesian Model," Cahiers de recherche 0527, CIRPEE. [Downloadable!]
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  14. Marcelo Sánchez, 2008. "Oil shocks and endogenous markups - results from an estimated euro area DSGE model," Working Paper Series 860, European Central Bank. [Downloadable!]
  15. Helga De Doncker, 2006. "Crédits aux particuliers - Analyse des données de la Centrale des Crédits aux Particuliers," Documents series 200601-1, National Bank of Belgium. [Downloadable!]
  16. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Are Constant Interest Rate Forecasts Modest Interventions? Evidence from an Estimated Open Economy DSGE Model of the Euro Area," Working Paper Series 180, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  17. Fabio Milani, 2005. "Learning, Monetary Policy Rules, and Macroeconomic Stability," Macroeconomics 0508019, EconWPA. [Downloadable!]
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