How frequently should we reestimate DSGE models? *

Abstract A common practice used by policy making institutions using DSGE models for forecasting is to re-estimate them only occasionally rather than every forecasting round. In this paper we ask how such a practice affects the accuracy of DSGE modelbased forecasts. To this end we use a canonical medium-sized New Keynesian model and compare how its quarterly real-time forecasts for the US economy vary with the interval between consecutive re-estimations. We find that updating the model parameters only once a year does not lead to any significant deterioration in the accuracy of point forecasts. On the other hand, there are some gains from increasing the frequency of re-estimation if one is interested in the quality of density forecasts

Boosting carry with equilibrium exchange rate estimates

We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies

A Service of zbw Forecasting with instabilities: An application to DSGE models with financial frictions Forecasting with Instabilities: an Application to DSGE Models with Financial Frictions Forecasting with Instabilities: an Application to DSGE Models wi

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Abstract This paper examines whether the presence of parameter instabilities in dynamic stochastic general equilibrium (DSGE) models affects their forecasting performance. We apply this analysis to medium-scale DSGE models with and without financial frictions for the US economy. Over the forecast period 2001-2013, the models augmented with financial frictions lead to an improvement in forecasts for inflation and the short term interest rate, while for GDP growth rate the performance depends on the horizon/period. We interpret this finding taking into account parameters instabilities. Fluctuation test shows that models with financial frictions outperform in forecasting inflation but not the GDP growth rate