Federal Reserve Bank of New York
DSGE forecasts of the lost recovery
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.
Cite this item
Michael Cai & Marco Del Negro & Marc Giannoni & Abhi Gupta & Pearl Li & Erica Moszkowski, DSGE forecasts of the lost recovery, Federal Reserve Bank of New York, Staff Reports 844, 01 Mar 2018, revised 01 Sep 2018.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
Keywords: DSGE models; real-time forecasts; Great Recession; financial frictions
This item with handle RePEc:fip:fednsr:844
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