Forecasting using DSGE models with financial frictions

This paper compares the quality of forecasts from DSGE models with and without financial frictions. We find that accounting for financial market imperfections does not result in a uniform improvement in the accuracy of point forecasts during non-crisis times, while the average quality of density forecast actually deteriorates. In contrast, adding frictions in the housing market proves very helpful during times of financial turmoil, outperforming both the frictionless benchmark and the alternative that incorporates financial frictions in the corporate sector. Moreover, we detect complementarities among the analyzed setups that can be exploited in the forecasting process.