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Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model

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Author Info

  • Adolfson, Malin

    () (Research Department, Central Bank of Sweden)

  • Lindé, Jesper

    () (Research Department, Central Bank of Sweden)

  • Villani, Mattias

    () (Research Department, Central Bank of Sweden)

Abstract

This paper analyzes the forecasting performance of an open economy DSGE model, estimated with Bayesian methods, for the Euro area during 1994Q1-2002Q4. We compare the DSGE model and a few variants of this model to various reduced form forecasting models such as vector autoregressions (VAR) and vector error correction models (VECM), estimated both by maximum likelihood and two different Bayesian approaches, and traditional benchmark models, e.g. the random walk. The accuracy of point forecasts, interval forecasts and the predictive distribution as a whole are assessed in an out-of-sample rolling event evaluation using several univariate and multivariate measures. The results show that the open economy DSGE model compares well with more empirical models and thus that the tension between rigor and fit in older generations of DSGE models is no longer present. We also critically examine the role of Bayesian model probabilities and other frequently used low-dimensional summaries, e.g. the log determinant statistic, as measures of overall forecasting performance.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 190.

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Length: 39 pages
Date of creation: 01 Sep 2005
Date of revision: 01 Jun 2006
Handle: RePEc:hhs:rbnkwp:0190

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Related research

Keywords: Bayesian inference; Forecasting; Open economy DSGE model; Vector autoregressive models;

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References

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  1. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," Working Papers 284, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
  2. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  5. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  6. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  7. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
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  9. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers 4848, C.E.P.R. Discussion Papers.
  10. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  11. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05.
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Citations

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Cited by:
  1. Kirdan Lees & Troy Matheson & Christie Smith, 2007. "Open Economy Dsge-Var Forecasting And Policy Analysis: Head To Head With The Rbnz Published Forecasts," CAMA Working Papers 2007-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Lavan Mahadeva & Juan Carlos parra, 2008. "Testing a DSGE model and its partner database," BORRADORES DE ECONOMIA 004507, BANCO DE LA REPÚBLICA.
  3. Rumler, Fabio & Valderrama, Maria Teresa, 2010. "Comparing the New Keynesian Phillips Curve with time series models to forecast inflation," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 126-144, August.
  4. Rochelle M. Edge & Refet S. Gurkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series 2011-11, Board of Governors of the Federal Reserve System (U.S.).
  5. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2006. "Forecasting Canadian Time Series With the New-Keynesian Model," Working Papers Central Bank of Chile 382, Central Bank of Chile.
  6. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2008. "A Comparison Of Forecast Performance Between Federal Reserve Staff Forecasts, Simple Reduced-Form Models, And A Dsge Model," CAMA Working Papers 2009-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," Working Paper Series 203, Sveriges Riksbank (Central Bank of Sweden).
  8. Frank Schorfheide & Keith Sill & Maxym Kryshko, 2008. "DSGE model-based forecasting of non-modelled variables," Working Papers 08-17, Federal Reserve Bank of Philadelphia.
  9. Luiz Renato Regis de Oliveira Lima & Wagner Piazza Gaglianone, 2012. "Constructing Optimal Density Forecasts from Point Forecast Combinations," Série Textos para Discussão (Working Papers) 5, Programa de Pós-Graduação em Economia - PPGE, Universidade Federal da Paraíba.
  10. Siok Kun, Sek, 2009. "The impacts of economic structures on the performance of simple policy rules in a small open economy," MPRA Paper 25065, University Library of Munich, Germany.

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