Journal Article
Evaluating point and density forecasts of DSGE models
This paper investigates the accuracy of forecasts from four DSGE models for inflation, output
growth and the federal funds rate using a real-time dataset synchronized with the Fed’s Greenbook
projections. Conditioning the model forecasts on the Greenbook nowcasts leads to forecasts that
are as accurate as the Greenbook projections for output growth and the federal funds rate. Only
for inflation the model forecasts are dominated by the Greenbook projections. A comparison with
forecasts from Bayesian VARs shows that the economic structure of the DSGE models which is
useful for the interpretation of forecasts does not lower the accuracy of forecasts. Combining
forecasts of several DSGE models increases precision in comparison to individual model forecasts.
Comparing density forecasts with the actual distribution of observations shows that DSGE
models overestimate uncertainty around point forecasts.
Key Words
- Bayesian VAR
- density forecasts
- DSGE models
- DSGE-Modell
- forecast combination
- forecasting
- Greenbook
- Model Uncertainty
- Real-time data