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How useful are estimated DSGE model forecasts?


  • Rochelle M. Edge
  • Refet S. Gurkaynak


DSGE models are a prominent tool for forecasting at central banks and the competitive forecasting performance of these models relative to alternatives--including official forecasts--has been documented. When evaluating DSGE models on an absolute basis, however, we find that the benchmark estimated medium scale DSGE model forecasts inflation and GDP growth very poorly, although statistical and judgmental forecasts forecast as poorly. Our finding is the DSGE model analogue of the literature documenting the recent poor performance of macroeconomic forecasts relative to simple naive forecasts since the onset of the Great Moderation. While this finding is broadly consistent with the DSGE model we employ--ie, the model itself implies that under strong monetary policy especially inflation deviations should be unpredictable--a "wrong" model may also have the same implication. We therefore argue that forecasting ability during the Great Moderation is not a good metric to judge the usefulness of model forecasts.

Suggested Citation

  • Rochelle M. Edge & Refet S. Gurkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series 2011-11, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2011-11

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    References listed on IDEAS

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      by Mark Buchanan in The Physics of Finance on 2014-02-14 19:27:00


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    Cited by:

    1. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.
    2. Galvão, Ana Beatriz, 2017. "Data revisions and DSGE models," Journal of Econometrics, Elsevier, vol. 196(1), pages 215-232.
    3. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    4. Stelios Bekiros & Alessia Paccagnini, 2013. "On the predictability of time-varying VAR and DSGE models," Empirical Economics, Springer, vol. 45(1), pages 635-664, August.
    5. Douglas J. Crookes & Martin P. De Wit, 2014. "Is System Dynamics Modelling of Relevance to Neoclassical Economists?," South African Journal of Economics, Economic Society of South Africa, vol. 82(2), pages 181-192, June.
    6. Kapetanios, George & Price, Simon & Theodoridis, Konstantinos, 2015. "A new approach to multi-step forecasting using dynamic stochastic general equilibrium models," Economics Letters, Elsevier, vol. 136(C), pages 237-242.

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    Economic forecasting ; Inflation (Finance) ; Econometric models;

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