Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment
In this paper, we put dynamic stochastic general equilibrium 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 incorporating a large information set using factor analysis can indeed improve the short-horizon predictive ability, as claimed by many researchers. The micro-founded DSGE model can provide reasonable forecasts for US inflation, especially with growing forecast horizons. To a certain extent, our results are consistent with the prevailing 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 compares both state-of-the-art data-driven and theory-based modelling in a rigorous manner. Copyright © 2008 John Wiley & Sons, Ltd.
Volume (Year): 28 (2009)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966|
When requesting a correction, please mention this item's handle: RePEc:jof:jforec:v:28:y:2009:i:2:p:167-182. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.