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How Useful are DSGE Macroeconomic Models for Forecasting?

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  • Wickens, Michael R.

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.

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  • Wickens, Michael R., 2012. "How Useful are DSGE Macroeconomic Models for Forecasting?," CEPR Discussion Papers 9049, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9049
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    Cited by:

    1. Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2016. "Comparing different data descriptors in Indirect Inference tests on DSGE models," Economics Letters, Elsevier, vol. 145(C), pages 157-161.
    2. Wickens, Michael R. & Polito, Vito, 2013. "Is the UK triple-A?," CEPR Discussion Papers 9378, C.E.P.R. Discussion Papers.
    3. Meenagh, David & Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2016. "What is the truth about DSGE models? Testing by indirect inference," Cardiff Economics Working Papers E2016/14, Cardiff University, Cardiff Business School, Economics Section.
    4. David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing DSGE Models by Indirect Inference: a Survey of Recent Findings," Open Economies Review, Springer, vol. 30(3), pages 593-620, July.
    5. Polito, Vito & Wickens, Michael, 2015. "Sovereign credit ratings in the European Union: A model-based fiscal analysis," European Economic Review, Elsevier, vol. 78(C), pages 220-247.
    6. Patrick Minford & Yue Gai & David Meenagh, 2022. "North and South: A Regional Model of the UK," Open Economies Review, Springer, vol. 33(3), pages 565-616, July.
    7. Meenagh, David & Minford, Patrick & Yang, Xiaoliang, 2018. "A heterogeneous-agent model of growth and inequality for the UK," Cardiff Economics Working Papers E2018/17, Cardiff University, Cardiff Business School, Economics Section.
    8. Ca’ Zorzi, Michele & Kolasa, Marcin & Rubaszek, Michał, 2017. "Exchange rate forecasting with DSGE models," Journal of International Economics, Elsevier, vol. 107(C), pages 127-146.
    9. Luca Fanelli & Marco M. Sorge, 2015. "Indeterminacy, Misspecification and Forecastability: Good Luck in Bad Policy?," CSEF Working Papers 402, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    10. D. Tutberidze & D. Japaridze, 2017. "Macroeconomic Forecasting Using Bayesian Vector Autoregressive Approach," Вестник Киевского национального университета имени Тараса Шевченко. Экономика., Socionet;Киевский национальный университет имени Тараса Шевченко, vol. 2(191), pages 42-49.
    11. Patrick Minford & Yongdeng Xu & Peng Zhou, 2015. "How Good are Out of Sample Forecasting Tests on DSGE Models?," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 333-351, November.
    12. Meenagh, David & Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2015. "Comparing Indirect Inference and Likelihood testing: asymptotic and small sample results," Cardiff Economics Working Papers E2015/8, Cardiff University, Cardiff Business School, Economics Section.
    13. Hongru Zhang & Yang Yang, 2019. "Prescribing for the tourism-induced Dutch disease: A DSGE analysis of subsidy policies," Tourism Economics, , vol. 25(6), pages 942-963, September.
    14. Wickens, Michael R., 2014. "How did we get to where we are now? Reflections on 50 years of macroeconomic and financial econometrics," CEPR Discussion Papers 10197, C.E.P.R. Discussion Papers.
    15. Bahram Adrangi & Juan Nicolás D’Amico, 2023. "Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework," JRFM, MDPI, vol. 16(5), pages 1-14, April.
    16. Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing Part of a DSGE Model by Indirect Inference," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(1), pages 178-194, February.
    17. Lutz Arnold & Stefanie Trepl, 2015. "A North-South Trade Model of Offshoring and Unemployment," Open Economies Review, Springer, vol. 26(5), pages 999-1039, November.
    18. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2015. "Small sample performance of indirect inference on DSGE models," Cardiff Economics Working Papers E2015/2, Cardiff University, Cardiff Business School, Economics Section.
    19. Meenagh, David & Minford, Patrick & Wickens, Michael & Xu, Yongdeng, 2018. "The small sample properties of Indirect Inference in testing and estimating DSGE models," Cardiff Economics Working Papers E2018/7, Cardiff University, Cardiff Business School, Economics Section.
    20. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
    21. Xiaoliang Yang & Patrick Minford & David Meenagh, 2021. "Inequality and Economic Growth in the UK," Open Economies Review, Springer, vol. 32(1), pages 37-69, February.
    22. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    23. Michael Wickens, 2015. "How Did We Get to Where We Are Now? Reflections on 50 Years of Macroeconomic and Financial Econometrics," Manchester School, University of Manchester, vol. 83, pages 60-82, December.
    24. McKnight, Stephen & Mihailov, Alexander & Rumler, Fabio, 2020. "Inflation forecasting using the New Keynesian Phillips Curve with a time-varying trend," Economic Modelling, Elsevier, vol. 87(C), pages 383-393.

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    More about this item

    Keywords

    Dsge models; Forecasting; Var models;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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