Predictive Likelihood Comparisons with DSGE and DSGE-VAR Models

59 Pages Posted: 11 May 2013

See all articles by Anders Warne

Anders Warne

European Central Bank (ECB)

Günter Coenen

European Central Bank (ECB)

Kai Philipp Christoffel

European Central Bank (ECB)

Date Written: April 15, 2013

Abstract

This paper shows how to compute the h-step-ahead predictive likelihood for any subset of the observed variables in parametric discrete time series models estimated with Bayesian methods. The subset of variables may vary across forecast horizons and the problem thereby covers marginal and joint predictive likelihoods for a fixed subset as special cases. The basic idea is to utilize well-known techniques for handling missing data when computing the likelihood function, such as a missing observations consistent Kalman filter for linear Gaussian models, but it also extends to nonlinear, nonnormal state-space models. The predictive likelihood can thereafter be calculated via Monte Carlo integration using draws from the posterior distribution. As an empirical illustration, we use euro area data and compare the forecasting performance of the New Area-Wide Model, a small-open-economy DSGE model, to DSGEVARs, and to reduced-form linear Gaussian models.

Keywords: Bayesian inference, forecasting, Kalman filter, missing data, Monte Carlo integration

JEL Classification: C11, C32, C52, C53, E37

Suggested Citation

Warne, Anders and Coenen, Günter and Christoffel, Kai Philipp, Predictive Likelihood Comparisons with DSGE and DSGE-VAR Models (April 15, 2013). ECB Working Paper No. 1536, Available at SSRN: https://ssrn.com/abstract=2250968 or http://dx.doi.org/10.2139/ssrn.2250968

Anders Warne (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Günter Coenen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7887 (Phone)
+49 69 1344 6575 (Fax)

Kai Philipp Christoffel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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