Evaluating DSGE Model Forecasts of Comovements
45 Pages Posted: 21 Jan 2011
Date Written: January 12, 2011
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.
Keywords: Bayesian Methods, DSGE Models, Forecast Evaluation, Macroeconomic Forecasting
JEL Classification: C11, C32, C53, E27, E47
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