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Evaluating DSGE Model Forecasts of Comovements

Evaluating DSGE Model Forecasts of Comovements

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This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. The authors construct posterior predictive checks to evaluate the calibration of conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. They find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. The authors construct posterior predictive checks to evaluate the calibration of conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. They find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.

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Published by: Federal Reserve Bank of Philadelphia on Feb 02, 2011
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03/27/2012

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WORKING PAPER NO. 11-5EVALUATING DSGE MODEL FORECASTSOF COMOVEMENTS
 
Edward HerbstUniversity of PennsylvaniaFrank SchorfheideUniversity of Pennsylvania,CEPR, NBER, and Visiting Scholar,Federal Reserve Bank of PhiladelphiaJanuary 12, 2011
 
Evaluating DSGE Model Forecasts of Comovements
Edward Herbst
University of Pennsylvania 
Frank Schorfheide
University of Pennsylvania CEPR, NBER, and Visiting Scholar,Federal Reserve Bank of Philadelphia 
January 12, 2011
Correspondence: Department of Economics, 3718 Locust Walk, University of Pennsylvania, Philadelphia,PA 19104-6297. Email: herbstep@sas.upenn.edu (E. Herbst); schorf@ssc.upenn.edu (F. Schorfheide). Weare very grateful to Rochelle Edge and Refet G¨urkaynak for providing us with their real-time data set forthe estimation of the Smets-Wouters model. We thank Frank Diebold as well as seminar participants at the2010 FRB Philadelphia Real-Time Data Research Center Conference, the Riksbank, and the 2010 ESOBEin Rotterdam. Schorfheide gratefully acknowledges financial support from the National Science Foundationunder Grant SES 0617803. The views expressed in this paper are those of the authors and do not necessarilyreflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. This paper isavailable free of charge at www.philadelphiafed.org/research-and-data/publications/working-papers/
 
Abstract
This paper develops and applies tools to assess multivariate aspects of BayesianDynamic Stochastic General Equilibrium (DSGE) model forecasts and their abilityto predict comovements among key macroeconomic variables. We construct posteriorpredictive checks to evaluate the calibration of conditional and unconditional densityforecasts, in addition to checks for root-mean-squared errors and event probabilitiesassociated with these forecasts. The checks are implemented on a three-equation DSGEmodel as well as the Smets and Wouters (2007) model using real-time data. We findthat the additional features incorporated into the Smets-Wouters model do not lead to auniform improvement in the quality of density forecasts and prediction of comovementsof output, inflation, and interest rates.
JEL CLASSIFICATION: C11, C32, C53, E27, E47KEY WORDS: Bayesian Methods, DSGE Models, Forecast Evaluation, MacroeconomicForecasting

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