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Testing a DSGE model and its partner database

  • Lavan Mahadeva

    ()

  • Juan Carlos Parra Alvarez

    ()

There is now an impetus to apply dynamic stochastic general equilibrium models to forecasting. But these models typically rely on purpose-built data, for example on tradable and nontradable sector outputs. How then do we know that the model will forecast well, in advance? We develop an early warning test of the database-model match and apply that to a Colombian model. Our test reveals where the combination should work (consumption) and where not (in investment). The test can be adapted to look at many likely sources of DSGE model failure.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 479.

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Handle: RePEc:bdr:borrec:479
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