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A comparision of forecast, simple reduced-form models, and a DSGE model

Author

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  • Rochelle M. Edge
  • Michael T. Kiley
  • Jean-Philippe Laforte

Abstract

This paper considers the “real-time” forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model - the Federal Reserve Board’s new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005 - thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting exercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecasting, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank.

Suggested Citation

  • Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2009. "A comparision of forecast, simple reduced-form models, and a DSGE model," CAMA Working Papers 2009-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2009-03
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/3_edge_kiley_laforte_2009.pdf
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    References listed on IDEAS

    as
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    1. Forecasting with DSGE models
      by Economic Logician in Economic Logic on 2009-07-28 19:23:00

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    1. Michael T. Kiley & Jean-Philippe Laforte & Rochelle M. Edge, 2008. "The Sources of Fluctuations in Residential Investment: A View from a Policy-Oriented DSGE Model of the U.S. Economic," 2008 Meeting Papers 990, Society for Economic Dynamics.

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