Information Content of DSGE Forecasts

TL;DR

This paper investigates whether DSGE model forecasts contain additional information beyond lagged values, finding they do for real GDP but not for the GDP deflator, highlighting their relative informational value.

Contribution

It provides empirical evidence that DSGE forecasts add information for real GDP beyond lagged variables, a novel insight into their predictive content.

Findings

DSGE forecasts contain additional information for real GDP.

Lagged-value forecasts do not add information beyond DSGE forecasts for real GDP.

For the GDP deflator, lagged forecasts contain information not in DSGE forecasts.

Abstract

This paper examines the question whether information is contained in forecasts from DSGE models beyond that contained in lagged values, which are extensively used in the models. Four sets of forecasts are examined. The results are encouraging for DSGE forecasts of real GDP. The results suggest that there is information in the DSGE forecasts not contained in forecasts based only on lagged values and that there is no information in the lagged-value forecasts not contained in the DSGE forecasts. The opposite is true for forecasts of the GDP deflator. Keywords: DSGE forecasts, Lagged values JEL Classification Codes: E10, E17, C53