Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/175470
Authors: 
Bekiros, Stelios
Cardani, Roberta
Paccagnini, Alessia
Villa, Stefania
Year of Publication: 
2016
Series/Report no.: 
Working Paper Series 16/11
Abstract: 
In the dynamic stochastic general equilibrium (DSGE) literature there has been an increasing aware- ness on the role that the banking sector can play in macroeconomic activity. We present a DSGE model with financial intermediation as in Gertler and Karadi (2011). The estimation of shocks and of the structural parameters shows that time-variation should be crucial in any attempted empirical analysis. Since DSGE modelling usually fails to take into account inherent nonlinearities of the economy, we propose a novel time-varying parameter (TVP) state-space estimation method for VAR processes both for homoskedastic and heteroskedastic error structures. We conduct an exhaustive empirical exercise to compare the out-of-sample predictive performance of the estimated DSGE model with that of standard ARs, VARs, Bayesian VARs and TVP-VARs. We find that the TVP-VAR provides the best forecasting performance for the series of GDP and net worth of financial intermediaries for all steps-ahead, while the DSGE model outperforms the other specifications in forecasting inflation and the federal funds rate at shorter horizons.
Subjects: 
Financial frictions
DSGE
Time-varying coefficients
Extended Kalman filter
Banking sector
JEL: 
C11
C13
C32
E37
Document Type: 
Working Paper
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