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Activity Number:
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220
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Type:
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Invited
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Date/Time:
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Tuesday, August 8, 2006 : 8:30 AM to 10:20 AM
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Sponsor:
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JBES-Journal of Business and Economic Statistics
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| Abstract - #305343 |
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Title:
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On the Fit and Forecasting Performance of New Keynesian Models
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Author(s):
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Frank Schorfheide*+ and Marco Del Negro and Frank Smets and Raf Wouters
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Companies:
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University of Pennsylvania and Federal Reserve Bank of Atlanta and European Central Bank and National Bank of Belgium
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Address:
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Department of Economics, Philadelphia, PA, 19104-6297,
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Keywords:
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Abstract:
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This paper provides new tools for the evaluation of DSGE models and applies them to a large-scale New Keynesian DSGE model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), then systematically relax the implied cross-equation restrictions. Let lambda denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of lambda. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model's impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find the degree of misspecification in large-scale DSGE models is no longer so large that it prevents their use in day-to-day policy analysis.
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