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Does the foreign sector help forecast domestic variables in DSGE models?

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  • Kolasa, Marcin
  • Rubaszek, Michał

Abstract

This paper evaluates the forecasting performances of several small open-economy DSGE models relative to a closed-economy benchmark using a long span of data for Australia, Canada and the United Kingdom. We find that opening the model economy usually does not improve the quality of point and density forecasts for key domestic variables, and can even cause it to deteriorate. We show that this result can be attributed largely to an increase in the forecast error due to the more sophisticated structure of the extended setup, which is not compensated for by a better model specification. This claim is based on a Monte Carlo experiment in which an open-economy model fails to beat its closed-economy benchmark consistently even if the former is the true data generating process.

Suggested Citation

  • Kolasa, Marcin & Rubaszek, Michał, 2018. "Does the foreign sector help forecast domestic variables in DSGE models?," International Journal of Forecasting, Elsevier, vol. 34(4), pages 809-821.
  • Handle: RePEc:eee:intfor:v:34:y:2018:i:4:p:809-821
    DOI: 10.1016/j.ijforecast.2018.05.008
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    Cited by:

    1. Ca’ Zorzi, Michele & Kolasa, Marcin & Rubaszek, Michał, 2017. "Exchange rate forecasting with DSGE models," Journal of International Economics, Elsevier, vol. 107(C), pages 127-146.
    2. repec:onb:oenbfi:y:2019:i:q1/19:b:2 is not listed on IDEAS
    3. repec:ukb:journl:y:2018:i:246:p:4-9 is not listed on IDEAS

    More about this item

    Keywords

    Forecasting; New open economy macroeconomics; Bayesian estimation;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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