DSGE Model-Based Forecasting

95 Pages Posted: 9 Mar 2012

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Date Written: March 1, 2012

Abstract

Dynamic stochastic general equilibrium (DSGE) models use modern macroeconomic theory to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis. We explain how to use DSGE models for all three purposes — forecasting, story telling, and policy experiments — and review their forecasting record. We also provide our own real-time assessment of the forecasting performance of the Smets and Wouters (2007) model data up to 2011, compare it with Blue Chip and Greenbook forecasts, and show how it changes as we augment the standard set of observables with external information from surveys (nowcasts, interest rate forecasts, and expectations for long-run inflation and output growth). We explore methods of generating forecasts in the presence of a zero-lower-bound constraint on nominal interest rates and conditional on counterfactual interest rate paths. Finally, we perform a postmortem of DSGE model forecasts of the Great Recession and show that forecasts from a version of the Smets-Wouters model augmented by financial frictions, and using spreads as an observable, compare well with Blue Chip forecasts.

Keywords: DSGE models, forecasting

JEL Classification: C11, C52, C54

Suggested Citation

Del Negro, Marco and Schorfheide, Frank, DSGE Model-Based Forecasting (March 1, 2012). FRB of New York Staff Report No. 554, Available at SSRN: https://ssrn.com/abstract=2018451 or http://dx.doi.org/10.2139/ssrn.2018451

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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