Incorporating judgement with DSGE models

Jaromír Beneš, Andrew Binning and Kirdan Lees

No DP2008/10, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: Central bank policymakers often cast judgement about macroeconomic forecasts in reduced form terms, basing this on off-model information that is not easily mapped to a structural DSGE framework. We show how to compute forecasts conditioned on policymaker judgement that are the most likely conditional forecasts from the perspective of the DSGE model, thereby maximising the influence of the model structure on the forecasts. We suggest using a simple implausibility index to track the magnitude and type of policymaker judgement. This is based on the structural shocks required to return policymaker judgement. We show how to use the methods for practical use in the policy environment and also apply the techniques to condition DSGE model forecasts on: (i) the long history of published forecasts from the Reserve Bank of New Zealand; (ii) constant interest rate forecasts; and (iii) inflation forecasts from a Bayesian VAR currently used in the policy environment at the Reserve Bank of New Zealand.

Keywords: DSGE models; monetary policy; conditional forecasts (search for similar items in EconPapers)
JEL-codes: C51 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-for and nep-mon
Date: 2008-06
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Persistent link: http://EconPapers.repec.org/RePEc:nzb:nzbdps:2008/10

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