Indeterminacy and Forecastability
AbstractRecent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky-price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large.
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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-48.
Length: 14 pages
Date of creation: Nov 2012
Date of revision:
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Forecasting; Indeterminacy; Monetary policy;
Other versions of this item:
- Ippei Fujiwara & Yasuo Hirose, 2011. "Indeterminacy and forecastability," Globalization and Monetary Policy Institute Working Paper 91, Federal Reserve Bank of Dallas.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
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