Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment
AbstractIn this paper, we put DSGE forecasts in competition with factor forecasts. We focus on these two models since they represent nicely the two opposing forecasting philosophies. The DSGE model on the one hand has a strong theoretical economic background; the factor model on the other hand is mainly data-driven. We show that by incooperating large information set using factor analysis can indeed improve the short horizon predictive ability, as claimed by manyresearchers. The micro founded DSGE model can provide reasonable forecasts for inflation, especially with growing forecast horizons. To a certain extent, our results are consistent with the prevailling view that simple time series models should be used in short-horizon forecasting and structural models should be used in long-horizon forecasting. Our paper compareds both state-of-the art data-driven and theory-based modelling in a rigorous manner. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2008,04.
Date of creation: 2008
Date of revision:
DSGE models; factor models; forecasting; forecastevaluation;
Other versions of this item:
- Mu-Chun Wang, 2009. "Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(2), pages 167-182.
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-04 (All new papers)
- NEP-CBA-2008-04-04 (Central Banking)
- NEP-DGE-2008-04-04 (Dynamic General Equilibrium)
- NEP-ECM-2008-04-04 (Econometrics)
- NEP-FOR-2008-04-04 (Forecasting)
- NEP-MAC-2008-04-04 (Macroeconomics)
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