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Forecasting with Instabilities: an Application to DSGE Models with Financial Frictions
Date Issued
2015-10
Date Available
2015-11-17T15:14:11Z
Abstract
This paper examines whether the presence of parameter instabilities in dynamic stochastic general equilibrium (DSGE) models affects their forecasting performance. We apply this analysis to medium-scale DSGE models with and without financial frictions for the US economy. Over the forecast period 2001-2013, the models augmented with financial frictions lead to an improvement in forecasts for inflation and the short term interest rate, while for GDP growth rate the performance depends on the horizon/period. We interpret this finding taking into account parameters instabilities. Fluctuation test shows that models with financial frictions outperform in forecasting inflation but not the GDP growth rate.
Sponsorship
European Commission - Seventh Framework Programme (FP7)
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Start Page
1
End Page
50
Series
UCD Centre for Economic Research Working Paper Series
WP2015/23
Copyright (Published Version)
2015 the authors
Classification
C11
C13
C32
E37
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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