Forecasting with instabilities: an application to DSGE models with financial frictions

Roberta Cardani, Alessia Paccagnini and Stefania Villa

No 1234, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We assess the importance of parameter instabilities from a forecasting standpoint in a set of medium-scale DSGE models with and without financial frictions using US real-time data. We find that failing to update DSGE model parameter estimates with new data arrival deteriorates point forecasts due to the estimated parameters variation. We also find that the presence of financial frictions helps to better forecast GDP and inflation.

Keywords: Bayesian estimation; forecasting; financial frictions; parameter instabilities (search for similar items in EconPapers)
JEL-codes: C11 C13 C32 E37 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Forecasting with instabilities: An application to DSGE models with financial frictions (2019)
Working Paper: Forecasting with Instabilities: an Application to DSGE Models with Financial Frictions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1234_19

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