Dealing with financial instability under a DSGE modeling approach with banking intermediation :
a predictability analysis versus TVP-VARs /
Stelios Bekiros (European University Institute (EUI)), Roberta Cardani (University of Bicocca), Alessia Paccagnini (University College Dublin) Stefania Villa (University of Foggia).
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| Summary: | In the dynamic stochastic general equilibrium (DSGE) literature there has been an increasing awareness 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. |
| Format: | Book |
| Language: | English |
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Dublin :
UCD School of Economics, University College Dublin,
September 2016.
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| Series: | Working paper (University College, Dublin. Centre for Economic Research) ;
16/11. |
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| Notes: | Includes bibliographical references. Physical description: 22 pages : graphs ; 21 cm. more |