Monday, April 16, 2012

DSGE forecasting again

The DSGE models which do a bit better aren't DSGE models. Nthe Baa-Treasury spread is added as an explanotory variable without any discussion of micro founding it. I claim that the model which does poorly rather than terribly is an ad hoc aggregate model without micro foundations.

Also, the outcome on the graph is not the BEA's current estimate (-8% at an annual rate). This means that the outcome as re-estimated months before the publication date of the post is well outside of the 90% confidence interval except for the last panel which shows an ad hoc model using contemporary data.

Finally why no forecasts using data from the trough ? There is no evidence in the post that the DSGE model had any success forecasting the recovery. The good looking figure adds another variable ad hoc. Oddly it just happens to track GDP the growth rate very well.

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