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Evaluating DSGE model forecasts of comovements

  • Edward Herbst
  • Frank Schorfheide

This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. We construct posterior predictive checks to evaluate conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. We find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-11.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-11
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  1. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  2. Edge, Rochelle M & Gürkaynak, Refet S., 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," CEPR Discussion Papers 8158, C.E.P.R. Discussion Papers.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  5. Schorfheide, Frank & Sill, Keith & Kryshko, Maxym, 2010. "DSGE model-based forecasting of non-modelled variables," International Journal of Forecasting, Elsevier, vol. 26(2), pages 348-373, April.
  6. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2009. "A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model," Finance and Economics Discussion Series 2009-10, Board of Governors of the Federal Reserve System (U.S.).
  7. Wolters, Maik H., 2013. "Evaluating point and density forecasts of DSGE models," Economics Working Papers 2013-03, Christian-Albrechts-University of Kiel, Department of Economics.
  8. John Geweke, 2007. "Bayesian Model Comparison and Validation," American Economic Review, American Economic Association, vol. 97(2), pages 60-64, May.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  10. Marco Del Negro & Frank Schorfheide, 2012. "DSGE model-based forecasting," Staff Reports 554, Federal Reserve Bank of New York.
  11. Faust, Jon & Wright, Jonathan H., 2009. "Comparing Greenbook and Reduced Form Forecasts Using a Large Realtime Dataset," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 468-479.
  12. Christoffel, Kai & Warne, Anders & Coenen, Günter, 2010. "Forecasting with DSGE models," Working Paper Series 1185, European Central Bank.
  13. Kling, John L & Bessler, David A, 1989. "Calibration-Based Predictive Distributions: An Application of Prequential Analysis to Interest Rates, Money, Prices, and Output," The Journal of Business, University of Chicago Press, vol. 62(4), pages 477-99, October.
  14. Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November.
  15. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November.
  16. Tilmann Gneiting & Fadoua Balabdaoui & Adrian E. Raftery, 2007. "Probabilistic forecasts, calibration and sharpness," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 69(2), pages 243-268.
  17. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  18. Frank Schorfheide, 2008. "DSGE model-based estimation of the New Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 397-433.
  19. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  20. L. Randall Wray & Stephanie Bell, 2004. "Introduction," Chapters, in: Credit and State Theories of Money, chapter 1 Edward Elgar.
  21. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
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