Do DSGE Models Forecast More Accurately Out-Of-Sample than VAR Models?☆The views expressed in this article are those of the authors

Refet Gürkaynak, Burçin Kısacıkoğlu and Barbara Rossi

A chapter in VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims, 2013, vol. 32, pp 27-79 from Emerald Group Publishing Limited

Abstract: Recently, it has been suggested that macroeconomic forecasts from estimated dynamic stochastic general equilibrium (DSGE) models tend to be more accurate out-of-sample than random walk forecasts or Bayesian vector autoregression (VAR) forecasts.Del Negro and Schorfheide (2013)in particular suggest that the DSGE model forecast should become the benchmark for forecasting horse-races. We compare the real-time forecasting accuracy of theSmets and Wouters (2007)DSGE model with that of several reduced-form time series models. We first demonstrate that none of the forecasting models is efficient. Our second finding is that there is no single best forecasting method. For example, typically simple AR models are most accurate at short horizons and DSGE models are most accurate at long horizons when forecasting output growth, while for inflation forecasts the results are reversed. Moreover, the relative accuracy of all models tends to evolve over time. Third, we show that there is no support to the common practice of using large-scale Bayesian VAR models as the forecast benchmark when evaluating DSGE models. Indeed, low-dimensional unrestricted AR and VAR forecasts may forecast more accurately.

Keywords: Forecasting; DSGE; Bayesian VAR; real-time data; forecast optimality; C22; C52; C53 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(2013)0000031002

DOI: 10.1108/S0731-9053(2013)0000031002

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