A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model

Abstract

This paper considers the 'real-time' forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model - the Federal Reserve Board's Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 to 2004. We find that the Edo model can provide forecasts that are competitive with those of Federal Reserve staff. Taken together with the fact that the Edo model has also proved useful in answering a range of policy questions, this suggests a significant and broad role for richly specified DSGE models in the toolbox of central bank models. © 2010 John Wiley & Sons, Ltd.