Indeterminacy and forecastability
Abstract: Recent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small.
File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0091.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2011
Pages: 12 pages
Note: Published as: Fujiwara, Ippei and Yasuo Hirose (2014), "Indeterminacy and Forecastability," Journal of Money, Credit and Banking 46 (1): 243-251.