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Time-Varying Parameter Four-Equation DSGE Model

Author

Listed:
  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Xiaojin Sun

    (Department of Economics and Finance, University of Texas at El Paso, USA)

Abstract

We build in the time-varying parameter feature into the Sims et al. (2020) four-equation Dynamic Stochastic General Equilibrium (DSGE) model in this paper. We find that both parameters and impulse responses of the variables in the four-equation DSGE model exhibit significant variation over time. Allowing model parameters to vary over time also improves the model's forecasting performance.

Suggested Citation

  • Rangan Gupta & Xiaojin Sun, 2022. "Time-Varying Parameter Four-Equation DSGE Model," Working Papers 202234, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202234
    as

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    References listed on IDEAS

    as
    1. Galvão, Ana Beatriz & Giraitis, Liudas & Kapetanios, George & Petrova, Katerina, 2016. "A time varying DSGE model with financial frictions," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 690-716.
    2. Del Negro, Marco & Hasegawa, Raiden B. & Schorfheide, Frank, 2016. "Dynamic prediction pools: An investigation of financial frictions and forecasting performance," Journal of Econometrics, Elsevier, vol. 192(2), pages 391-405.
    3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    4. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    5. Canova, Fabio & Gambetti, Luca, 2009. "Structural changes in the US economy: Is there a role for monetary policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 477-490, February.
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    7. Cardani, Roberta & Paccagnini, Alessia & Villa, Stefania, 2019. "Forecasting with instabilities: An application to DSGE models with financial frictions," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    8. Efrem Castelnuovo, 2012. "Fitting U.S. Trend Inflation: A Rolling-Window Approach," Advances in Econometrics, in: DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments, pages 201-252, Emerald Group Publishing Limited.
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    11. Sims, Eric & Wu, Jing Cynthia, 2021. "Evaluating Central Banks’ tool kit: Past, present, and future," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 135-160.
    12. Negro, Marco Del & Schorfheide, Frank, 2013. "DSGE Model-Based Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 57-140, Elsevier.
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    More about this item

    Keywords

    Four-Equation DSGE; Time-Varying Parameter; Forecasting;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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