Evaluating UK point and density forecasts from an estimated DSGE model: the role of off-model information over the financial crisis

Nicholas Fawcett, Lena Koerber (lena.koerber@bankofengland.co.uk), Riccardo M. Masolo and Matt Waldron (matthew.waldron@bankofengland.co.uk)
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Lena Koerber: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Authors registered in the RePEc Author Service: Lena Boneva

No 538, Bank of England working papers from Bank of England

Abstract: This paper investigates the real-time forecast performance of the Bank of England’s main DSGE model, COMPASS, before, during and after the financial crisis with reference to statistical and judgemental benchmarks. A general finding is that COMPASS’s relative forecast performance improves as the forecast horizon is extended (as does that of the Statistical Suite of forecasting models). The performance of forecasts from all three sources deteriorates substantially following the financial crisis. The deterioration is particularly marked for the DSGE model’s GDP forecasts. One possible explanation for that, and a key difference between DSGE models and judgemental forecasts, is that judgemental forecasts are implicitly conditioned on a broader information set, including faster-moving indicators that may be particularly informative when the state of the economy is evolving rapidly, as in periods of financial distress. Consistent with that interpretation, GDP forecasts from a version of the DSGE model augmented to include a survey measure of short-term GDP growth expectations are competitive with the judgemental forecasts at all horizons in the post-crisis period. More generally, a key theme of the paper is that both the type of off-model information and the method used to apply it are key determinants of DSGE model forecast accuracy.

Keywords: DSGE models; forecasting; financial crisis. (search for similar items in EconPapers)
JEL-codes: C53 E12 E17 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-07-31
New Economics Papers: this item is included in nep-dge, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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