On the fit and forecasting performance of New-Keynesian models

Marco Del Negro (), Frank Schorfheide (), Frank Rafael Smets and Raf Wouters ()

No 491, Working Paper Series from European Central Bank

Abstract: The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let Lambda denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of Lambda. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGEVAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.

Keywords: Bayesian Analysis; DSGE Models; Model Evaluation; Vector Autoregressions. (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-for and nep-mac
Date: 2005-06
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Related works:
Working Paper: On the Fit and Forecasting Performance of New Keynesian Models (2005)
Working Paper: On the fit and forecasting performance of New Keynesian models (2004)
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