How Useful Are Estimated DSGE Model Forecasts for Central Bankers?

By Rochelle M. Edge, R. Gürkaynak. 2010

206 citations recorded by the source corpus.

Dynamic stochastic general equilibrium (DSGE) models are a prominent tool for forecasting at central banks, and the competitive forecasting performance of these models relative to alternatives, including official forecasts, has been documented. When evaluating DSGE models on an absolute basis, however, we find that the benchmark estimated medium-scale DSGE model forecasts inflation and GDP growth very poorly, although statistical and judgmental forecasts do equally poorly. Our finding is the DSGE model analogue of the literature documenting the recent poor performance of macroeconomic forecasts relative to simple naive forecasts since the onset of the Great Moderation. Although this finding is broadly consistent with the DSGE model we employ—the model itself implies that especially under strong monetary policy, inflation deviations should be unpredictable—a "wrong" model may also have the same implication. We therefore argue that forecasting ability during the Great Moderation is not a good metric by which to judge models.

Subfields: Economics and Econometrics, Electrical and Electronic Engineering

View Paper: https://www.semanticscholar.org/paper/fc66ced2401b7d5fc6941bc3c9a3108818b03bbf

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Citations in the corpus

Rare shocks, great recessions (2013, unknown): “…was found to be competitive in terms of accuracy relative to private forecasters and reduced form models not only during the Great Moderation period (see Smets and Wouters (2007) and Edge and Gürkaynak (2010)), but also including data for the Great Recession (Del Negro and Schorfheide (2012)).”
Forecasting: theory and practice (2020, background): “), Bekiros and Paccagnini (2015b), Euro Area: Warne et al. (2010) Time-Varying VAR and Markov-Switching US: Bekiros et al. (2016), Euro Area: Bekiros and Paccagnini (2016) Institutional Forecasts US: Edge and Gurkaynak (2010), Kolasa et al. (2012), Del Negro¨ and Schorfheide (2013), Wolters (2015) D”
Alternative tests for correct specification of conditional predictive densities (2019, background): “Edge, Kiley and Laforte (2010) evaluate the predictive ability of the Federal Reserve Board’s model (Edo), and Edge and Gürkaynak (2010) provide a thorough analysis of the forecasting ability of the same model using real-time data.”