Balanced Growth Approach to Tracking Recessions

Marta Boczoń and Jean-Francois Richard
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Marta Boczoń: Department of Economics, University of Pittsburgh, 230 South Bouquet Street, Wesley W. Posvar Hall, Pittsburgh, PA 15213, USA

Econometrics, 2020, vol. 8, issue 2, 1-35

Abstract: In this paper, we propose a hybrid version of Dynamic Stochastic General Equilibrium models with an emphasis on parameter invariance and tracking performance at times of rapid changes (recessions). We interpret hypothetical balanced growth ratios as moving targets for economic agents that rely upon an Error Correction Mechanism to adjust to changes in target ratios driven by an underlying state Vector AutoRegressive process. Our proposal is illustrated by an application to a pilot Real Business Cycle model for the US economy from 1948 to 2019. An extensive recursive validation exercise over the last 35 years, covering 3 recessions, is used to highlight its parameters invariance, tracking and 1- to 3-step ahead forecasting performance, outperforming those of an unconstrained benchmark Vector AutoRegressive model.

Keywords: hybrid model; VAR; DSGE; ECM; RBC (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2020
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