Dealing with financial instability under a DSGE modeling approach with banking intermediation : a predictability analysis versus TVP-VARs
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1572-3089; 1878-0962
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Journal of financial stability, 2016, Vol. 26, pp. 216-227
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BEKIROS, Stelios D., CARDANI, Roberta, PACCAGNINI, Alessia, VILLA, Stefania, Dealing with financial instability under a DSGE modeling approach with banking intermediation : a predictability analysis versus TVP-VARs, Journal of financial stability, 2016, Vol. 26, pp. 216-227 - https://hdl.handle.net/1814/44652
Abstract
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.
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Available online 22 July 2016