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On the fit and forecasting performance of New-Keynesian models

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  • Del Negro, Marco
  • Schorfheide, Frank
  • Smets, Frank
  • Wouters, Raf

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 ? 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 ?. 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 DSGE-VAR. 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. JEL Classification: C11, C32, C53

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0491.

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Date of creation: Jun 2005
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Handle: RePEc:ecb:ecbwps:20050491

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Keywords: Bayesian Analysis; DSGE Models; model evaluation; vector autoregressions;

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