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Forecasting the Spanish economy with an augmented VAR–DSGE model

  • Gonzalo Fernández-de-Córdoba
  • José Torres


During the past ten years Dynamic Stochastic General Equilibrium (DSGE) models have become an important tool in quantitative macroeconomics. However, DSGE models was not considered as a forecasting tool until very recently. The objective of this paper is twofold. First, we compare the forecasting ability of a canonical DSGE model for the Spanish economy with other standard econometric techniques. More precisely, we compare out-of-sample forecasts coming from different estimation methods of the DSGE model to the forecasts produced by a VAR and a Bayesian VAR. Second, we propose a new method for combining DSGE and VAR models (Augmented VAR-DSGE) through the expansion of the variable space where the VAR operates with artificial series obtained from a DSGE model. The results indicate that the out-of-sample forecasting performance of the proposed method outperforms all the considered alternatives.

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Article provided by Spanish Economic Association in its journal SERIEs.

Volume (Year): 2 (2011)
Issue (Month): 3 (September)
Pages: 379-399

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Handle: RePEc:spr:series:v:2:y:2011:i:3:p:379-399
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