Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179355
Authors: 
McAdam, Peter
Warne, Anders
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper 2140
Abstract: 
We compare real-time density forecasts for the euro area using three DSGE models. The benchmark is the Smets-Wouters model and its forecasts of real GDP growth and inflation are compared with those from two extensions. The first adds financial frictions and expands the observables to include a measure of the external finance premium. The second allows for the extensive labor-market margin and adds the unemployment rate to the observables. The main question we address is if these extensions improve the density forecasts of real GDP and inflation and their joint forecasts up to an eight-quarter horizon. We find that adding financial frictions leads to a deterioration in the forecasts, with the exception of longer-term inflation forecasts and the period around the Great Recession. The labor market extension improves the medium to longer-term real GDP growth and shorter to medium-term inflation forecasts weakly compared with the benchmark model.
Subjects: 
Bayesian inference
DSGE models
forecast comparison
inflation
output
predictive likelihood
JEL: 
C11
C32
C52
C53
E37
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3245-5
Document Type: 
Working Paper

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