Does foreign sector help forecast domestic variables in DSGE models?

Marcin Kolasa and Michał Rubaszek

No 2016-022, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: This paper evaluates the forecasting performance of several small open economy DSGE models relative to a closed economy benchmark using a long span of data for Australia, Canada and the United Kingdom. We find that opening the economy does not improve, and even deteriorates the quality of point and density forecasts for key domestic variables. We show that this result can be to a large extent attributed to an increase in forecast error due to a more sophisticated structure of the extended setup. This claim is based on a Monte Carlo experiment, in which an open economy model fails to consistently beat its closed economy benchmark even if it is the true data generating process.

Keywords: Forecasting; DSGE models; New Open Economy Macroeconomics; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: D58 E17 F41 F47 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-11
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://hdl.handle.net/20.500.12182/1154 (application/pdf)

Related works:
Journal Article: Does the foreign sector help forecast domestic variables in DSGE models? (2018)
Working Paper: Does the foreign sector help forecast domestic variables in DSGE models? (2018)
Working Paper: Does foreign sector help forecast domestic variables in DSGE models? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2016022

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