DSGE forecasts of the lost recovery

Abstract: The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated an unprecedented policy environment. We document the real real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using the pseudo real-time forecasting performance results from a battery of DSGE models. We find the New York Fed DSGE model's forecasting accuracy to be comparable to that of private forecasters and notably better, for output growth, than the median forecasts from the Federal Open Market Committee?s Summary of Economic Projections. The model?s financial frictions were key in obtaining these results, as they implied a slow recovery following the financial crisis.

Keywords: DSGE models; real-time forecasts; Great Recession; financial frictions;

JEL Classification: C11; C32; C54; E43; E44;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-09-01

Number: 844