Indeterminacy and forecastability
AbstractRecent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 91.
Date of creation: 2011
Date of revision:
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-CBA-2011-10-09 (Central Banking)
- NEP-DGE-2011-10-09 (Dynamic General Equilibrium)
- NEP-FOR-2011-10-09 (Forecasting)
- NEP-MAC-2011-10-09 (Macroeconomics)
- NEP-MON-2011-10-09 (Monetary Economics)
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