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A Forecasting Metric for Evaluating DSGE Models for Policy Analysis

  • Gupta, Abhishek

This paper evaluates the strengths and weaknesses of dynamic stochastic general equilibrium (DSGE) models from the standpoint of their usefulness in doing monetary policy analysis. The paper isolates features most relevant for monetary policymaking and uses the diagnostic tools of posterior predictive analysis to evaluate these features. The paper provides a diagnosis of the observed flaws in the model with regards to these features that helps in identifying the structural flaws in the model. The paper finds that model misspecification causes certain pairs of structural shocks in the model to be correlated in order to fit the observed data.

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File URL: http://mpra.ub.uni-muenchen.de/26718/1/MPRA_paper_26718.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26718.

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Date of creation: 30 Oct 2010
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Handle: RePEc:pra:mprapa:26718
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  1. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  2. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  3. Frank Smets & Raf Wouters, 2004. "Forecasting with a Bayesian DSGE Model: An Application to the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 841-867, November.
  4. Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
  5. Finn E. Kydland & Edward C. Prescott, 1994. "The computational experiment: an econometric tool," Staff Report 178, Federal Reserve Bank of Minneapolis.
  6. Malin Adolfson & Michael K. Andersson & Jesper Lindé & Mattias Villani & Anders Vredin, 2007. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 111-144, December.
  7. Jon Faust & Abhishek Gupta, 2012. "Posterior Predictive Analysis for Evaluating DSGE Models," NBER Working Papers 17906, National Bureau of Economic Research, Inc.
  8. 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.).
  9. 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.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  11. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2007. "Natural rate measures in an estimated DSGE model of the U.S. economy," Finance and Economics Discussion Series 2007-08, Board of Governors of the Federal Reserve System (U.S.).
  12. John Geweke, 2007. "Bayesian Model Comparison and Validation," American Economic Review, American Economic Association, vol. 97(2), pages 60-64, May.
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