Forecasting with a Bayesian DSGE model: an application to the euro area

Frank Smets and Raf Wouters

No 389, Working Paper Series from European Central Bank

Abstract: In monetary policy strategies geared towards maintaining price stability conditional and unconditional forecasts of inflation and output play an important role. This paper illustrates how modern sticky-price dynamic stochastic general equilibrium models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with a-theoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU. JEL Classification: E4, E5

Keywords: DSGE models; euro area; forecasting; monetary policy (search for similar items in EconPapers)
Date: 2004-09
Note: 58657
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (132)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp389.pdf (application/pdf)

Related works:
Journal Article: Forecasting with a Bayesian DSGE Model: An Application to the Euro Area (2004)
Working Paper: Forecasting with a Bayesian DSGE Model: An Application to the Euro Area (2004)
Working Paper: Forecasting with a Bayesian DSGE Model: an application to the euro area (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2004389

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().