DSGE-based forecasting: What should our perspective be?

Abstract

The article compares the accuracy of point forecasts made with a structural dynamic stochastic general equilibrium model (DSGE) to those made with vector autoregressions estimated by OLS (VAR) and by Bayesian methods (BVAR). The main question addressed in the article is whether DSGE-based forecasts are as accurate as non-structural model ones. The comparison is made on the ground of mean squared forecast errors. The results show that the forecasting ability of the DSGE model is in general inferior to that of the BVAR. However, the difference is not critical. Moreover, for some variables and forecasting horizons, the DSGE model produces the forecast with the lowest error among all three models in question.