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On the fit and forecasting performance of New-Keynesian models

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Author Info
Marco Del Negro () (Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, USA)
Frank Schorfheide () (University of Pennsylvania, Department of Economics, 3718 Locust Walk, Philadelphia, PA 19 104, USA)
Frank Smets () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Raf Wouters () (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium)

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Abstract

The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let Lambda denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of Lambda. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGEVAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.

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Paper provided by European Central Bank in its series Working Paper Series with number 491.

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Length: 56 pages
Date of creation: Jun 2005
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Handle: RePEc:ecb:ecbwps:20050491

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Related research
Keywords: Bayesian Analysis; DSGE Models; Model Evaluation; Vector Autoregressions.;

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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References listed on IDEAS
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