Evaluating Point and Density Forecasts of DSGE Models

55 Pages Posted: 16 Jul 2010 Last revised: 27 Mar 2015

See all articles by Maik H. Wolters

Maik H. Wolters

Kiel Institute for the World Economy - IFW

Date Written: January 23, 2012

Abstract

This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.

Keywords: DSGE models, forecasting, model uncertainty, forecast combination, density forecasts, real-time data, Greenbook

JEL Classification: C53, E31, E32, E37

Suggested Citation

Wolters, Maik H., Evaluating Point and Density Forecasts of DSGE Models (January 23, 2012). Available at SSRN: https://ssrn.com/abstract=1639365 or http://dx.doi.org/10.2139/ssrn.1639365

Maik H. Wolters (Contact Author)

Kiel Institute for the World Economy - IFW ( email )

United States

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