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Data-Rich DSGE Model Forecasts of the Great Recession and its Recovery

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  • Sacha Gelfer

    (Bentley University)

Abstract

I investigate the extent to which modern dynamic stochastic general equilibrium (DSGE) models can produce macroeconomic and labor market dynamics in response to a financial crisis that are consistent with the experience of the Great Recession. Using the methods of Boivin and Giannoni (2006) and Kryshko (2011), I estimate two DSGE models in a data-rich environment. The two models estimated in this paper include close variations of the Smets and Wouters (2003; 2007) New Keynesian model and the FRBNY (Del Negro et al., 2013) model that augments the Smets & Wouters model with a financial accelerator. I find the model with a financial accelerator that is estimated in a data-rich environment is able to significantly out-forecast modern DSGE models not estimated in a data-rich environment and the Survey of Professional Forecasters (SPF) in regard to core macroeconomic growth variables and many labor and financial metrics including the unemployment rate, total number of employees by sector and business loans. (Copyright: Elsevier)

Suggested Citation

  • Sacha Gelfer, 2019. "Data-Rich DSGE Model Forecasts of the Great Recession and its Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 18-41, April.
    • Handle: RePEc:red:issued:18-269
    DOI: 10.1016/j.red.2018.12.005
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    Cited by:

    1. Laureys, Lien & Meeks, Roland & Wanengkirtyo, Boromeus, 2021. "Optimal simple objectives for monetary policy when banks matter," European Economic Review, Elsevier, vol. 135(C).
    2. Gelfer, Sacha & Gibbs, Christopher G., 2023. "Measuring the effects of large-scale asset purchases: The role of international financial markets and the financial accelerator," Journal of International Money and Finance, Elsevier, vol. 131(C).
    3. Bas Scheer, 2022. "Addressing Unemployment Rate Forecast Errors in Relation to the Business Cycle," CPB Discussion Paper 434, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Gelfer, Sacha, 2021. "Evaluating the forecasting power of an open-economy DSGE model when estimated in a data-Rich environment," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    5. Gelfer, Sacha & Gibbs, Christopher, 2021. "Comparing Monetary Policy Tools in an Estimated DSGE model with International Financial Markets," Working Papers 2021-13, University of Sydney, School of Economics.
    6. Gelfer, Sacha, 2020. "Re-evaluating Okun’s Law: Why all recessions and recoveries are “different”," Economics Letters, Elsevier, vol. 196(C).
    7. Bowen Fu, Ivan Mendieta-Muñoz, 2023. "Structural shocks and trend inflation," Working Paper Series, Department of Economics, University of Utah 2023_04, University of Utah, Department of Economics.
    8. Stylianos Asimakopoulos & Marco Lorusso & Francesco Ravazzolo, 2023. "A Bayesian DSGE Approach to Modelling Cryptocurrency"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 1012-1035, December.
    9. Donald Coletti, 2023. "A Blueprint for the Fourth Generation of Bank of Canada Projection and Policy Analysis Models," Discussion Papers 2023-23, Bank of Canada.

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    More about this item

    Keywords

    Data-rich DSGE; DSGE-DFM; Financial accelerator; Forecast evaluation;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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