Merging Structural and Reduced-Form Models for Forecasting: Opening the Dsge-Var Box

66 Pages Posted: 4 Dec 2019

See all articles by Jaime Martinez-Martin

Jaime Martinez-Martin

European Central Bank (ECB); Banco de España

Richard Morris

European Central Bank (ECB)

Luca Onorante

European Central Bank (ECB); European University Institute

Fabio M. Piersanti

European Central Bank (ECB)

Date Written: December, 2019

Abstract

The post-crisis environment has posed important challenges to standard forecasting models. In this paper, we exploit several combinations of a large-scale DSGE structural model with standard reduced-form methods such as (B)VAR (i.e. DSGE-VAR and Augmented-(B)VARDSGE methods) and assess their use for forecasting the Spanish economy. Our empirical findings suggest that: (i) the DSGE model underestimates growth of real variables due to its mean reverting properties in the context of a sample that is difficult to deal with; (ii) in spite of this, reduced-form VARs benefit from the imposition of an economic prior from the structural model; and (iii) pooling information in the form of variables extracted from the structural model with (B)VAR methods does not give rise to any relevant gain in terms of forecasting accuracy.

Keywords: Bayesian VAR, DSGE models, forecast comparison, real time data

JEL Classification: C54, E37, F3, F41

Suggested Citation

Martinez-Martin, Jaime and Morris, Richard and Onorante, Luca and Piersanti, Fabio M., Merging Structural and Reduced-Form Models for Forecasting: Opening the Dsge-Var Box (December, 2019). ECB Working Paper No. 2335. Available at SSRN: https://ssrn.com/abstract=3497524

Jaime Martinez-Martin (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Richard Morris

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Luca Onorante

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

European University Institute

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Fabio M. Piersanti

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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