On the Fit and Forecasting Performance of New Keynesian Models

51 Pages Posted: 5 May 2005

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

The Paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let delta 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 delta. 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 that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.

Keywords: Bayesian analysis, DSGE models, model evaluation, vector autoregression

JEL Classification: C11, C32, C53

Suggested Citation

Del Negro, Marco and Schorfheide, Frank and Smets, Frank and Wouters, Rafael, On the Fit and Forecasting Performance of New Keynesian Models (January 2005). Available at SSRN: https://ssrn.com/abstract=717704

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States

Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

Frank Smets

European Central Bank (ECB) ( email )

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D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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