How Useful are DSGE Model Forecasts for Central Bankers?

Brooking conducted its Fall 2010 Conference. THere are some excellent papers there as always.

Regulating the Shadow Banking System

Gary Gorton, Yale University, NBER; Andrew Metrick, Yale University, NBER
Speech by Governor Daniel K. Tarullo of the Federal Reserve on the Shadow Banking System

  • Abstract (PDF)
  • Conference Paper (PDF)
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    The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares

    Jonathan A. Parker, Northwestern University, NBER; Annette Vissing-Jorgensen, Northwestern University, NBER, CEPR

  • Abstract (PDF)
  • Conference Paper (PDF)
  •  

     

    The State of the Safety Net in the Post-Welfare Reform Era

    Marianne Bitler, UC Irvine, San Francisco Federal Reserve Bank; Hilary W. Hoynes, UC Davis

  • Abstract (PDF)
  • Conference Paper (PDF)
  •  

     

    State Government Spending and Transitory Income Fluctuations

    James R. Hines Jr., University of Michigan, NBER

  • Abstract (PDF)
  • Conference Paper (PDF)
  •  

     

    The Impact of No Child Left Behind on Students, Teachers and Schools

    Thomas S. Dee, University of Virginia, NBER; Brian Jacob, University of Michigan, NBER

  • Conference Paper (PDF)
  •  

     

    How Useful are Estimated DSGE Model Forecasts for Central Bankers?

    Rochelle Edge, Federal Reserve Board; Refet S. Gurkaynak,Bilkent University

  • Abstract (PDF)
  • Conference Paper (PDF)
  • I was reading the last paper on DSGE models and found it interesting. The authors compare DGSE  forecasts with another model and find both are poor in forecasting.

     DSGE models are very poor in forecasting, but so are everything else. Forecasting ability is a nonissue in DSGE model evaluation because in recent samples (over which these models can be evaluated using real time data) there isn.t much to be forecasted. This is consistent with the literature on the Great Moderation, which emphasizes that not only the standard deviation of macroeconomic .uctuations, but also their nature has changed. In particular, cycles are driven more by temporary, i.e. unforecastable, shocks. The lack of forecastability is not evidence against the DSGE model and indeed can be evidence in favor of it. Monetary policy was characterized with a strongly stabilizing rule in this period and the model implies that such policy will undo predictable .uctuations, especially in in.ation. Thus, the model itself implies that .uctuations should not be forecastable. We leave scrutinizing this point and studying the forecasting ability of the model in pre- and post-Great Moderation periods in more detail to future work.

    William White ‘s recent remarks on these models are also interesting:

    Keynes famously addressed the awkwardness of facts when he replied to a journalist. “When the facts change, I change my mind. What do you do sir?” Both Keynes and Hayek began their analysis of the 1930’s with the observation of a simple fact. Deep slumps are possible, and the evidence presented in this paper further confirms that fact. The awkward thing is that much of modern macro theory seems to deny this possibility. New Keynesian and New Classical models deny it by the assumption that the economy quickly re equilibrates in response to shocks. In contrast, the models used by central banks (and many international financial institutions) effectively deny it on the basis of a different assumption; namely, that appropriate policy can always stop out the downturn and return us to good economic performance. Since this second assumption seems more plausible than the first, which seems particularly hard to sustain after almost three years of global economic turmoil, I will return to an assessment of its plausibility in a moment. If, when, and how policies might improve our economic circumstances is currently a matter of crucial importance.

     

    Apart from the DSGE paper, the other paper are also good. The one by Gary Gorton on shadow banking should be very good as well.

     

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