How Useful are DSGE Macroeconomic Models for Forecasting?

35 Pages Posted: 28 Sep 2012

See all articles by Michael Wickens

Michael Wickens

Cardiff Business School; University of York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2012

Abstract

We find that forecasts from DSGE models are not more accurate than either times series models or official forecasts, but neither are they any worse. We also find that all three types of forecast failed to predict the recession that started in 2007 and continued to forecast poorly even after the recession was known to have begun. We investigate why these results occur by examining the structure of the solution of DSGE models and compare this with pure time series models. We show that the main factor is the dynamic structure of DSGE models. Their backward-looking dynamics gives them a similar forecasting structure to time series models and their forward-looking dynamics, which consists of expected values of future exogenous variables, is difficult to forecast accurately. As a result we suggest that DSGE models should not be tested through their forecasting ability.

Keywords: DSGE models, Forecasting, VAR models

JEL Classification: C5, E1

Suggested Citation

Wickens, Michael and Wickens, Michael, How Useful are DSGE Macroeconomic Models for Forecasting? (July 2012). CEPR Discussion Paper No. DP9049, Available at SSRN: https://ssrn.com/abstract=2153500

Michael Wickens (Contact Author)

Cardiff Business School ( email )

University of York ( email )

Heslington
York, YO10 5DD
United Kingdom
+44 1904 433 764 (Phone)
+44 1904 433 575 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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