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DSGE model-based forecasting

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Author Info

  • Marco Del Negro
  • Frank Schorfheide

Abstract

Dynamic stochastic general equilibrium (DSGE) models use modern macroeconomic theory to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis. We explain how to use DSGE models for all three purposes—forecasting, story telling, and policy experiments—and review their forecasting record. We also provide our own real-time assessment of the forecasting performance of the Smets and Wouters (2007) model data up to 2011, compare it with Blue Chip and Greenbook forecasts, and show how it changes as we augment the standard set of observables with external information from surveys (nowcasts, interest rate forecasts, and expectations for long-run inflation and output growth). We explore methods of generating forecasts in the presence of a zero-lower-bound constraint on nominal interest rates and conditional on counterfactual interest rate paths. Finally, we perform a postmortem of DSGE model forecasts of the Great Recession and show that forecasts from a version of the Smets-Wouters model augmented by financial frictions, and using spreads as an observable, compare well with Blue Chip forecasts.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 554.

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Date of creation: 2012
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Handle: RePEc:fip:fednsr:554

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Related research

Keywords: Stochastic analysis ; Equilibrium (Economics) ; Time-series analysis ; Econometric models ; Monetary policy ; Economic forecasting ; Recessions;

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References

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Citations

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Cited by:
  1. Sergei Ivashchenko, 2013. "Dynamic stochastic general equilibrium model with banks and endogenous defaults of firms," EUSP Deparment of Economics Working Paper Series, European University at St. Petersburg, Department of Economics Ec-02/13, European University at St. Petersburg, Department of Economics.
  2. Jörg Breitung & Sandra Eickmeier, 2014. "Analyzing business and financial cycles using multi-level factor models," CAMA Working Papers 2014-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Frank Schorfheide, 2012. "EconomicDynamics Interviews Frank Schorfheide on DSGE Model Estimation," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 13(2), April.
  4. Edward Herbst & Frank Schorfheide, 2011. "Evaluating DSGE model forecasts of comovements," Working Papers 11-5, Federal Reserve Bank of Philadelphia.
  5. Bekiros, Stelios D. & Paccagnini, Alessia, 2014. "Bayesian forecasting with small and medium scale factor-augmented vector autoregressive DSGE models," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 71(C), pages 298-323.

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