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Does the foreign sector help forecast domestic variables in DSGE models?

Marcin Kolasa () and Michał Rubaszek ()

No 282, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: This paper evaluates the forecasting performance of several small open economy DSGE models relative to a closed economy benchmark using a long span of data for Australia, Canada and the United Kingdom. We find that opening the model economy usually does not improve, and even deteriorates the quality of point and density forecasts for key domestic variables. We show that this result can be to a large extent attributed to an increase in forecast error due to a more sophisticated structure of the extended setup which is not compensated by better model specification. This claim is based on a Monte Carlo experiment, in which an open economy model fails to consistently beat its closed economy benchmark even if the former is the true data generating process.

Keywords: Forecasting; DSGE models; New Open Economy Macroeconomics; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: D58 E17 F41 F47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac and nep-ore
Date: 2018
Note: This project was financed by the National Science Centre grant No. 2012/07/E/HS4/01080. It benefited from suggestions by two anonymous referees as well as comments from participants to the International Symposium on Forecasting (Santander, June 2016), Ecomod Conference (Lisbon, July 2016), Narodowy Bank Polski Workshop on Forecasting (Warsaw,November 2016), ECB IPA Seminar (Frankfurt, January 2017) and ERFIN conference (Warsaw, September 2017).
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Journal Article: Does the foreign sector help forecast domestic variables in DSGE models? (2018) Downloads
Working Paper: Does foreign sector help forecast domestic variables in DSGE models? (2016) Downloads
Working Paper: Does foreign sector help forecast domestic variables in DSGE models? (2016) Downloads
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