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Smets and Wouters model estimated with skewed shocks - empirical study of forecasting properties

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  • Grzegorz Koloch

Abstract

In this paper we estimate a Smets and Wouters (2007) model with shocks following a closed skew normal distribution (csn) introduced in Gonzalez-Farias et al. (2004), which nests a normal distribution as a special case. In the paper we discuss priors for model parameters, including skewness-related parameters of shocks, i.e. location, scale and skewness parameters. Using data ranging from 1991Q1 to 2012Q2 we estimate the model and recursively verify its out-of sample forecasting properties for time period 2007Q1 - 2012Q2, therefore including the recent financial crisis, within a forecasting horizon from 1 up to 8 quarters ahead. Using a RMSE measure we compare the forecasting performance of the model with skewed shocks wit a model estimated using normally distributed shocks. We find that inclusion of skewness can help forecasting some variables (consumption, investment and hours worked), but, on the other hand, results in deterioration in the other ones (output, inflation wages and the short rate).

Suggested Citation

  • Grzegorz Koloch, 2016. "Smets and Wouters model estimated with skewed shocks - empirical study of forecasting properties," KAE Working Papers 2016-023, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2016023
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    File URL: http://kolegia.sgh.waw.pl/pl/KAE/Documents/WorkingPapersKAE/WPKAE_2016_023.pdf
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    References listed on IDEAS

    as
    1. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
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    More about this item

    Keywords

    DSGE; Forecasting; Closed Skew-Normal Distribution;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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