Would DSGE Models have Predicted the Great Recession in Austria?

Breuss, Fritz (2018) Would DSGE Models have Predicted the Great Recession in Austria? Journal of Business Cycle Research, 14 (1). pp. 105-126. ISSN 2509-7970

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Dynamic stochastic general equilibrium (DSGE) models are the common workhorse of modern macroeconomic theory. Whereas story-telling and policy analysis were in the forefront of applications since its inception, the forecasting perspective of DSGE models is only recently topical. In this study, we perform a post-mortem analysis of the predictive power of DSGE models in the case of Austria's Great Recession in 2009. For this purpose, eight DSGE models with different characteristics (small and large models; closed and open economy models; one and two-country models) were used. The initial hypothesis was that DSGE models are inferior in ex-ante forecasting a crisis. Surprisingly however, it turned out that not all but those models which implemented features of the causes of the global financial crisis (like financial frictions or interbank credit flows) could not only detect the turning point of the Austrian business cycle early in 2008 but they also succeeded in forecasting the following severe recession in 2009. In comparison, non-DSGE methods like the ex-ante forecast with the Global Economic (Macro) Model of Oxford Economics and WIFO's expert forecasts performed comparable or better than most DSGE models in the crisis.

Item Type: Article
Additional Information: Open access funding provided by Vienna University of Economics and Business (WU).
Keywords: DSGE models, Business cycles, Forecasting, Open-economy macroeconomics
Classification Codes: JEL C11, C32, C53, E32, E37
Divisions: Departments > Volkswirtschaft > Internationale Wirtschaft
Version of the Document: Published
Depositing User: Gertraud Novotny
Date Deposited: 05 Mar 2018 10:43
Last Modified: 05 May 2018 11:56
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/86082/
URI: https://epub.wu.ac.at/id/eprint/6086


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