Euro area real-time density forecasting with financial or labor market frictions

Peter McAdam () and Anders Warne

No 2140, Working Paper Series from European Central Bank

Abstract: We compare real-time density forecasts for the euro area using three DSGE models. The benchmark is the Smets-Wouters model and its forecasts of real GDP growth and inflation are compared with those from two extensions. The first adds financial frictions and expands the observables to include a measure of the external finance premium. The second allows for the extensive labor-market margin and adds the unemployment rate to the observables. The main question we address is if these extensions improve the density forecasts of real GDP and inflation and their joint forecasts up to an eight-quarter horizon. We find that adding financial frictions leads to a deterioration in the forecasts, with the exception of longer-term inflation forecasts and the period around the Great Recession. The labor market extension improves the medium to longer-term real GDP growth and shorter to medium-term inflation forecasts weakly compared with the benchmark model. JEL Classification: C11, C32, C52, C53, E37

Keywords: Bayesian inference; DSGE models; forecast comparison; inflation; output; predictive likelihood (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-dge, nep-eec, nep-for and nep-mac
Note: 50336
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2140.en.pdf (application/pdf)

Related works:
Journal Article: Euro area real-time density forecasting with financial or labor market frictions (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182140

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().