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Forecasting the Spanish economy with an Augmented VAR-DSGE model

  • Gonzalo Fernandez-de-Córdoba

    (Universidad de Salamanca)

  • José L. Torres

    (Universidad de Málaga)

During the past ten years Dynamic Stochastic General Equilibrium (DSGE) models have become an important tool in quantitative macroeconomics. However, DSGE models was not considered as a forecasting tool until very recently. The objective of this paper is twofold. First, we compare the forecasting ability of a canonical DSGE model for the Spanish economy with other standard econometric techniques. More precisely, we compare out-of-sample forecasts coming from different estimation methods of the DSGE model to the forecasts produced by a VAR and a Bayesian VAR. Second, we propose a new method for combining DSGE and VAR models (Augmented VAR-DSGE) through the expansion of the variable space where the VAR operates with artificial series obtained from a DSGE model. The results indicate that the out-of-sample forecasting performance of the proposed method outperforms all the considered alternatives.

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Paper provided by Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center in its series Working Papers with number 2009-1.

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Length: 23 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:mal:wpaper:2009-1
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