Forecasting with Instabilities: an Application to DSGE Models with Financial Frictions

Roberta Cardani, Alessia Paccagnini and Stefania Villa

No 201523, Working Papers from School of Economics, University College Dublin

Abstract: This paper examines whether the presence of parameter instabilities in dynamic stochastic general equilibrium (DSGE) models affects their forecasting performance. We apply this analysis to medium-scale DSGE models with and without financial frictions for the US economy. Over the forecast period 2001-2013, the models augmented with financial frictions lead to an improvement in forecasts for inflation and the short term interest rate, while for GDP growth rate the performance depends on the horizon/period. We interpret this finding taking into account parameters instabilities. Fluctuation test shows that models with financial frictions outperform in forecasting inflation but not the GDP growth rate.

Keywords: Bayesian estimation; Forecasting; Financial frictions; Parameter instabilities (search for similar items in EconPapers)
JEL-codes: C11 C13 C32 E37 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015-10
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac and nep-ore
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http://hdl.handle.net/10197/7227 First version, 2015 (application/pdf)

Related works:
Journal Article: Forecasting with instabilities: An application to DSGE models with financial frictions (2019)
Working Paper: Forecasting with instabilities: an application to DSGE models with financial frictions (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201523

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