Forecasting with a DSGE model of a small open economy within the monetary union
Journal of forecasting, 2014, Vol. 33, No. 5, pp. 315-338
MARCELLINO, Massimiliano, RYCHALOVSKA, Yuliya, Forecasting with a DSGE model of a small open economy within the monetary union, Journal of forecasting, 2014, Vol. 33, No. 5, pp. 315-338 - https://hdl.handle.net/1814/39466
Retrieved from Cadmus, EUI Research Repository
In this paper we lay out a two-region dynamic stochastic general equilibrium (DSGE) model of an open economy within the European Monetary Union. The model, which is built in the New Keynesian tradition, contains real and nominal rigidities such as habit formation in consumption, price and wage stickiness as well as rich stochastic structure. The framework also incorporates the theory of unemployment, small open economy aspects and a nominal interest rate that is set exogenously by the area-wide monetary authority. As an illustration, the model is estimated on Luxembourgish data. We evaluate the properties of the estimated model and assess its forecasting performance relative to reduced-form model such as vector autoregression (VAR). In addition, we study the empirical validity of the DSGE model restrictions by applying a DSGE-VAR approach.
First published online: 28 July 2014
Cadmus permanent link: https://hdl.handle.net/1814/39466
Full-text via DOI: 10.1002/for.2306
ISSN: 1099-131X; 0277-6693
Files associated with this item
There are no files associated with this item.