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Exploiting the monthly data flow in structural forecasting
Reichlin, Lucrezia; Monti, Francesca; Giannone, Domenico (2015-12-01)
This paper develops a framework that allows us to combine the tools provided by structural models for economic interpretation and policy analysis with those of reduced-form models designed for nowcasting. We show how to map a quarterly dynamic stochastic general equilibrium (DSGE) model into a higher frequency (monthly) version that maintains the same economic restrictions. Moreover, we show how to augment the monthly DSGE with auxiliary data that can enhance the analysis and the predictive accuracy in now-casting and forecasting. Our empirical results show that both the monthly version of ...
Staff Reports , Paper 751

Working Paper
Macroeconomic Effects of Banking Sector Losses across Structural Models
Covas, Francisco; Kiley, Michael T.; Driscoll, John C.; Jahan-Parvar, Mohammad; Iacoviello, Matteo; Sim, Jae W.; Guerrieri, Luca; Queraltó, Albert (2015-06-03)
The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.
Finance and Economics Discussion Series , Paper 2015-44

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Fitting observed inflation expectations
Del Negro, Marco; Eusepi, Stefano (2010-11-01)
This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)?type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public?s information on, the central banks? inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have ...
Staff Reports , Paper 476

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On the Validity of Classical and Bayesian DSGE-Based Inference
Petrova, Katerina (2024-01-01)
This paper studies large sample classical and Bayesian inference in a prototypical linear DSGE model and demonstrates that inference on the structural parameters based on a Gaussian likelihood is unaffected by departures from Gaussianity of the structural shocks. This surprising result is due to a cancellation in the asymptotic variance resulting into a generalized information equality for the block corresponding to the structural parameters. The underlying reason for the cancellation is the certainty equivalence property of the linear rational expectation model.The main implication of this ...
Staff Reports , Paper 1084

Working Paper
The US Banks’ Balance Sheet Transmission Channel of Oil Price Shocks
Gelain, Paolo; Lorusso, Marco (2022-11-15)
We document the existence of a quantitative relevant banks' balance-sheet transmission channel of oil price shocks by estimating a dynamic stochastic general equilibrium model with banking and oil sectors. The associated amplification mechanism implies that those shocks explain a non-negligible share of US GDP growth fluctuations, up to 17 percent, instead of 6 percent absent the banking sector. Also, they mitigated the severity of the Great Recession’s trough. GDP growth would have been 2.48 percentage points more negative in 2008Q4 without the beneficial effect of low oil prices. The ...
Working Papers , Paper 22-33

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Dynamic prediction pools: an investigation of financial frictions and forecasting performance
Del Negro, Marco; Schorfheide, Frank; Hasegawa, Raiden B. (2014-10-01)
We provide a novel methodology for estimating time-varying weights in linear prediction pools, which we call dynamic pools, and use it to investigate the relative forecasting performance of dynamic stochastic general equilibrium (DSGE) models, with and without financial frictions, for output growth and inflation in the period 1992 to 2011. We find strong evidence of time variation in the pool?s weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but doesn?t perform as well in tranquil periods. The dynamic ...
Staff Reports , Paper 695

Working Paper
Analyzing data revisions with a dynamic stochastic general equilibrium model
Sill, Keith; Croushore, Dean (2014-09-23)
We use a structural dynamic stochastic general equilibrium model to investigate how initial data releases of key macroeconomic aggregates are related to final revised versions and how identified aggregate shocks influence data revisions. The analysis sheds light on how well preliminary data approximate final data and on how policy makers might condition their view of the preliminary data when formulating policy actions. The results suggest that monetary policy shocks and multifactor productivity shocks lead to predictable revisions to the initial release data on output growth and inflation.
Working Papers , Paper 14-29

Working Paper
Optimal Monetary and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation
Kiley, Michael T.; Sim, Jae W. (2015-09-04)
We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument ...
Finance and Economics Discussion Series , Paper 2015-78

Discussion Paper
Forecasting the Great Recession: DSGE vs. Blue Chip
Del Negro, Marco; Schorfheide, Frank; Herbst, Daniel (2012-04-16)
Dynamic stochastic general equilibrium (DSGE) models have been trashed, bashed, and abused during the Great Recession and after. One of the many reasons for the bashing was the models’ alleged inability to forecast the recession itself. Oddly enough, there’s little evidence on the forecasting performance of DSGE models during this turbulent period. In the paper “DSGE Model-Based Forecasting,” prepared for Elsevier’s Handbook of Economic Forecasting, two of us (Del Negro and Schorfheide), with the help of the third (Herbst), provide some of this evidence. This post shares some of our ...
Liberty Street Economics , Paper 20120416

Working Paper
The Effects of Foreign Shocks when Interest Rates are at Zero
Bodenstein, Martin; Guerrieri, Luca; Erceg, Christopher J. (2009)
In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if ...
International Finance Discussion Papers , Paper 983

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