On the predictability of time-varying VAR and DSGE models

Stelios Bekiros and Alessia Paccagnini

Open Access publications from School of Economics, University College Dublin

Abstract: Over the last few years, there has been a growing interest in DSGE modelling for predicting macroeconomic fluctuations and conducting quantitative policy analysis. Hybrid DSGE models have become popular for dealing with some of the DSGE misspecifications as they are able to solve the trade-off between theoretical coherence and empirical fit. However, these models are still linear and they do not consider time variation for parameters. The time-varying properties in VAR or DSGE models capture the inherent nonlinearities and the adaptive underlying structure of the economy in a robust manner. In this article, we present a state-space time-varying parameter VAR model. Moreover, we focus on the DSGE–VAR that combines a microfounded DSGE model with the flexibility of a VAR framework. All the aforementioned models as well simple DSGEs and Bayesian VARs are used in a comparative investigation of their out-of-sample predictive performance regarding the US economy. The results indicate that while in general the classical VAR and BVARs provide with good forecasting results, in many cases the TVP–VAR and the DSGE–VAR outperform the other models.

Keywords: Hybrid DSGE; Time-varying VAR; Kalman filter; Bayesian VAR; Forecasting (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in: Empirical Economics, 45(1) 2013-08

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http://hdl.handle.net/10197/7326 Open Access version, 2013 (application/pdf)

Related works:
Journal Article: On the predictability of time-varying VAR and DSGE models (2013)
Working Paper: On the predictability of time-varying VAR and DSGE models (2013)
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