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DSGE forecasts of the lost recovery

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  • Michael Cai
  • Marco Del Negro
  • Marc Giannoni
  • Abhi Gupta
  • Pearl Li
  • Erica Moszkowski

Abstract

The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated an unprecedented policy environment. We document the real real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using the pseudo real-time forecasting performance results from a battery of DSGE models. We find the New York Fed DSGE model's forecasting accuracy to be comparable to that of private forecasters and notably better, for output growth, than the median forecasts from the Federal Open Market Committee?s Summary of Economic Projections. The model?s financial frictions were key in obtaining these results, as they implied a slow recovery following the financial crisis.

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  • Michael Cai & Marco Del Negro & Marc Giannoni & Abhi Gupta & Pearl Li & Erica Moszkowski, 2018. "DSGE forecasts of the lost recovery," Staff Reports 844, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:844
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    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Schools of Economic Thought, Epistemology of Economics > Economic Methodology > Dynamic Stochastic General Equilibrium > Estimated DSGE Models > Forecasting with DSGE Models

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    Cited by:

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    2. Richard Higgins, C., 2020. "Financial frictions and changing macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    DSGE models; real-time forecasts; Great Recession; financial frictions;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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