On the fit and forecasting performance of New-Keynesian models
Raf Wouters (),
Marco Del Negro () and
Frank Schorfheide ()
No 491, Working Paper Series from European Central Bank
The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let λ denote the extent to which the restrictions are being relaxed. We document how the in- and out-of sample fit of the resulting specification (DSGE-VAR) changes as a function of λ. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model's impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored. JEL Classification: C11, C32, C53
Keywords: Bayesian analysis; DSGE models; model evaluation; vector autoregressions (search for similar items in EconPapers)
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Working Paper: On the Fit and Forecasting Performance of New Keynesian Models (2005)
Working Paper: On the fit and forecasting performance of New Keynesian models (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005491
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