Indeterminacy and forecastability

Ippei Fujiwara and Yasuo Hirose

No 91, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Recent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small.

JEL-codes: C53 C62 E17 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge, nep-for, nep-mac and nep-mon
Note: Published as: Fujiwara, Ippei and Yasuo Hirose (2014), "Indeterminacy and Forecastability," Journal of Money, Credit and Banking 46 (1): 243-251.
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Indeterminacy and Forecastability (2014)
Working Paper: Indeterminacy and Forecastability (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:91

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