A structural approach to combining external and DSGE model forecasts

Thorsten Drautzburg

Economics Letters, 2024, vol. 235, issue C

Abstract: This note shows that combining external forecasts such as the Survey of Professional Forecasters can significantly increase DSGE forecast accuracy while preserving the interpretability in terms of structural shocks. Applied to pseudo real-time from 1997q2 onward, the canonical Smets and Wouters (2007) model has significantly smaller forecast errors when giving a high weight to the SPF forecasts. Incorporating the SPF forecast gives a larger role to risk premium shocks during the global financial crisis. A model with financial frictions favors a larger weight on the DSGE model forecast.

Keywords: Forecasting; Model averaging; DSGE model; Judgmental forecasts (search for similar items in EconPapers)
JEL-codes: C32 C53 (search for similar items in EconPapers)
Date: 2024
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Working Paper: A Structural Approach to Combining External and DSGE Model Forecasts (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000223

DOI: 10.1016/j.econlet.2024.111538

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