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Forecasting with instabilities: An application to DSGE models with financial frictions

Roberta Cardani (), Alessia Paccagnini and Stefania Villa ()

Journal of Macroeconomics, 2019, vol. 61, issue C, -

Abstract: We assess the importance of parameter instabilities from a forecasting viewpoint in a set of medium-scale DSGE models with and without financial frictions using US real-time data. We find that, first, failing to update DSGE model parameter estimates with new data arrival deteriorates point forecasts due to the estimated parameters variation. And second, the presence of financial frictions helps to better explain GDP and inflation forecast

Keywords: Bayesian estimation; Forecasting; Financial frictions; Parameter instabilities,JEL classificationC11; C13; C32; E37 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Forecasting with instabilities: an application to DSGE models with financial frictions (2019) Downloads
Working Paper: Forecasting with Instabilities: an Application to DSGE Models with Financial Frictions (2015) Downloads
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DOI: 10.1016/j.jmacro.2019.103133

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