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A Forecasting Metric for Evaluating DSGE Models for Policy Analysis

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  • Gupta, Abhishek

Abstract

This paper evaluates the strengths and weaknesses of dynamic stochastic general equilibrium (DSGE) models from the standpoint of their usefulness in doing monetary policy analysis. The paper isolates features most relevant for monetary policymaking and uses the diagnostic tools of posterior predictive analysis to evaluate these features. The paper provides a diagnosis of the observed flaws in the model with regards to these features that helps in identifying the structural flaws in the model. The paper finds that model misspecification causes certain pairs of structural shocks in the model to be correlated in order to fit the observed data.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26718.

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Date of creation: 30 Oct 2010
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Handle: RePEc:pra:mprapa:26718

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Keywords: Posterior predictive analysis; DSGE; Monetary Policy; Forecast Errors; Model Evaluation.;

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References

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  1. Finn E. Kydland & Edward C. Prescott, 1994. "The computational experiment: an econometric tool," Working Paper 9420, Federal Reserve Bank of Cleveland.
  2. Frank Smets & Raf Wouters, 2004. "Forecasting with a Bayesian DSGE Model: An Application to the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 841-867, November.
  3. 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.
  4. Jon Faust & Abhishek Gupta, 2012. "Posterior Predictive Analysis for Evaluating DSGE Models," NBER Working Papers 17906, National Bureau of Economic Research, Inc.
  5. Edge, Rochelle M. & Kiley, Michael T. & Laforte, Jean-Philippe, 2008. "Natural rate measures in an estimated DSGE model of the U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2512-2535, August.
  6. Adolfson, Malin & Andersson, Michael K. & Lindé, Jesper & Villani, Mattias & Vredin, Anders, 2005. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," Working Paper Series 188, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  8. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  9. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  10. Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
  11. Gupta, Abhishek, 2010. "A Forecasting Metric for Evaluating DSGE Models for Policy Analysis," MPRA Paper 26718, University Library of Munich, Germany.
  12. John Geweke, 2007. "Bayesian Model Comparison and Validation," American Economic Review, American Economic Association, vol. 97(2), pages 60-64, May.
  13. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
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Cited by:
  1. Taylor, John B. & Wieland, Volker, 2010. "Surprising comparative properties of monetary models: Results from a new model database," Working Paper Series 1261, European Central Bank.
  2. Jon Faust, 2012. "DSGE Models: I Smell a Rat (and It Smells Good)," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 53-64, March.
  3. Gupta, Abhishek, 2010. "A Forecasting Metric for Evaluating DSGE Models for Policy Analysis," MPRA Paper 26718, University Library of Munich, Germany.
  4. Jon Faust & Abhishek Gupta, 2012. "Posterior Predictive Analysis for Evaluating DSGE Models," NBER Working Papers 17906, National Bureau of Economic Research, Inc.

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