Indeterminacy and Forecastability

Ippei Fujiwara and Yasuo Hirose

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Recent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky-price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large.

Keywords: Forecasting; Indeterminacy; Monetary policy (search for similar items in EconPapers)
JEL-codes: C53 C62 E17 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2012-11
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Related works:
Journal Article: Indeterminacy and Forecastability (2014)
Working Paper: Indeterminacy and forecastability (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2012-48

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