Real-Time Forecast Evaluation of DSGE Models with Stochastic Volatility / Francis X. Diebold, Frank Schorfheide, Minchul Shin.

Format:

Book

Author/Creator:

Diebold, Francis X.

Contributor:

National Bureau of Economic Research.

Schorfheide, Frank.

Shin, Minchul.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22615.

NBER working paper series no. w22615

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Recent work has analyzed the forecasting performance of standard dynamic stochastic general equilibrium (DSGE) models, but little attention has been given to DSGE models that incorporate nonlinearities in exogenous driving processes. Against that background, we explore whether incorporating stochastic volatility improves DSGE forecasts (point, interval, and density). We examine real-time forecast accuracy for key macroeconomic variables including output growth, inflation, and the policy rate. We find that incorporating stochastic volatility in DSGE models of macroeconomic fundamentals markedly improves their density forecasts, just as incorporating stochastic volatility in models of financial asset returns improves their density forecasts.

Notes:

Print version record

September 2016.