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Forecasting the US Economy with a Factor-Augmented Vector Autoregressive DSGE model

  • Stelios Bekiros
  • Alessia Paccagnini

Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be applied directly to the data and often yield weak prediction re- sults. Very recently, hybrid DSGE models have become popular for dealing with some of the model misspecifications. Ma jor advances in estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world prob- lems as richer sources of data become available. ln this study we introduce a Bayesian approach to estimate a novel Factor Augmented DSGE model that extends the model of Consolo et al. [Consolo, A., Favero, C.A., and Paccagnini, A., 2009. On the Statistical ldentification of DSGE Models. Journal of Econometrics 150, 99-115]. We perform a comparative predictive evaluation of many different specifications of estimated DSGE models and various classes of VAR models, using datasets from the US economy. Simple and hybrid DSGE models are implemented, such as DSGE-VAR and tested against standard, Bayesian and Factor Augmented VARs. The results can be useful for macro-forecasting and monetary policy analysis.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-183.

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Length: 24 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-183
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Web page: http://www.ipag.fr

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  1. Fernández-Villaverde, Jesús, 2009. "The Econometrics of DSGE Models," CEPR Discussion Papers 7157, C.E.P.R. Discussion Papers.
  2. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  3. Benati, Luca & Surico, Paolo, 2008. "VAR analysis and the Great Moderation," Working Paper Series 0866, European Central Bank.
  4. Sumru Altug, 1986. "Time to build and aggregate fluctuations: some new evidence," Working Papers 277, Federal Reserve Bank of Minneapolis.
  5. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," CEPR Discussion Papers 6027, C.E.P.R. Discussion Papers.
  6. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2000. "Reference Cycles: The NBER Methodology Revisited," CEPR Discussion Papers 2400, C.E.P.R. Discussion Papers.
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