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How useful are estimated DSGE model forecasts?

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Author Info

  • Rochelle M. Edge
  • Refet S. Gurkaynak

Abstract

DSGE models are a prominent tool for forecasting at central banks and the competitive forecasting performance of these models relative to alternatives--including official forecasts--has been documented. When evaluating DSGE models on an absolute basis, however, we find that the benchmark estimated medium scale DSGE model forecasts inflation and GDP growth very poorly, although statistical and judgmental forecasts forecast as poorly. Our finding is the DSGE model analogue of the literature documenting the recent poor performance of macroeconomic forecasts relative to simple naive forecasts since the onset of the Great Moderation. While this finding is broadly consistent with the DSGE model we employ--ie, the model itself implies that under strong monetary policy especially inflation deviations should be unpredictable--a "wrong" model may also have the same implication. We therefore argue that forecasting ability during the Great Moderation is not a good metric to judge the usefulness of model forecasts.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-11.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-11

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Related research

Keywords: Economic forecasting ; Inflation (Finance) ; Econometric models;

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References

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Blog mentions

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  1. Wall St shorts economists
    by Mark Buchanan in The Physics of Finance on 2014-02-14 13:27:00
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Cited by:
  1. Franziska Ohnsorge & Yevgeniya, 2011. "Forecasting growth in eastern Europe and central Asia," Working Papers 137, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. Stelios Bekiros & Alessia Paccagnini, 2013. "On the predictability of time-varying VAR and DSGE models," Empirical Economics, Springer, vol. 45(1), pages 635-664, August.
  3. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.

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