On the Fit and Forecasting Performance of New Keynesian Models
FRB of Atlanta Working Paper No. 2004-37
58 Pages Posted: 11 Feb 2005
There are 3 versions of this paper
On the Fit and Forecasting Performance of New Keynesian Models
On the Fit and Forecasting Performance of New Keynesian Models
On the Fit and Forecasting Performance of New Keynesian Models
Abstract
The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let Lambda denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of Lambda. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model's impulse responses to structural shocks with those of the best-fitting DSGEVAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.
Keywords: Bayesian analysis, DSGE models, model evaluation, vector autoregressions
JEL Classification: C11, C32, C53
Suggested Citation: Suggested Citation
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