Real-Time Forecast Evaluation of DSGE Models with Stochastic Volatility

53 Pages Posted: 27 Sep 2017 Last revised: 18 Jan 2018

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

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)

Minchul Shin

University of Illinois

Multiple version iconThere are 3 versions of this paper

Date Written: August 18, 2016

Abstract

Recent work has analyzed the forecasting performance of standard dynamic stochastic general equilibrium (DSGE) models, but little attention has been given to DSGE models that incorporate nonlinearities in exogenous driving processes. Against that background, we explore whether incorporating stochastic volatility improves DSGE forecasts (point, interval, and density). We examine real-time forecast accuracy for key macroeconomic variables including output growth, inflation, and the policy rate. We find that incorporating stochastic volatility in DSGE models of macroeconomic fundamentals markedly improves their density forecasts, just as incorporating stochastic volatility in models of financial asset returns improves their density forecasts.

Keywords: Dynamic Stochastic General Equilibrium Model, Prediction, Stochastic Volatility

JEL Classification: E17, E27, E37, E47

Suggested Citation

Diebold, Francis X. and Schorfheide, Frank and Shin, Minchul, Real-Time Forecast Evaluation of DSGE Models with Stochastic Volatility (August 18, 2016). CFS Working Paper, No. 577, Available at SSRN: https://ssrn.com/abstract=3042684 or http://dx.doi.org/10.2139/ssrn.3042684

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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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

Minchul Shin

University of Illinois ( email )

601 E John St
Champaign, IL 61820
United States

HOME PAGE: http://www.minchulshin.com

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