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Forecasting with Real Business Cycle Models

Forecasting at business cycle frequencies is traditionally done with statistically estimated econometric models. This paper takes a different approach, using a calibrated dynamic general equilibrium model in line with the real business cycle literature. First attempts by others have not proven very successful, most probably because the structure of the models were too simple. We take a simple real business cycle model, the Kydland-Prescott (1982) model economy sufficiently simplified to accomodate for the availability of state variables in the data, augmented by government expense shocks. The forecasts are then evaluated with the traditional tools of the econometric forecaster. It is found that the model has potential for making good forecasts when compared to estimated models that are equally parcimonious. Aux fréquences conjoncturelles, la prévision économique est traditionnellement effectuée avec des modèles économétriques évalués de façon statistique. Ce papier prend une approche différente en utilisant un modèle d'équilibre général dynamique calibré dans la lignée de la littérature sur les cycles réels. De premières tentatives par d'autres chercheurs ne se sont pas avérées particulièrement fructueuses, fort probablement en raison d'une structure de modèle trop simple. Ce modèle-ci a jusqu'à 12 variables d'état, après y avoir ajouté une dimension internationale, et est calibré pour une économie mondiale composée de quatre nations (États-Unis, Canada, Japon et Europe), où les cycles conjoncturels sont influencés par des chocs de productivité et des dépenses publiques. Les prévisions sont alors évaluées avec les outils traditionnels de l'économiste. Il s'avère que le modèle est prometteur pour faire de la prévision.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 131.

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Length: 19 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:cre:crefwp:131
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  1. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  3. Ireland, Peter N., 2001. "Technology shocks and the business cycle: On empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 703-719, May.
  4. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," Working Papers 93-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
  6. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  7. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal.
  8. Christian Zimmermann, 1995. "International Trade over the Business Cycle: Stylized Facts and Remaining Puzzles," Cahiers de recherche CREFE / CREFE Working Papers 37, CREFE, Université du Québec à Montréal, revised Aug 1997.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  10. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 497-510, December.
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