How Useful Are Estimated DSGE Model Forecasts for Central Bankers? [with Comments and Discussion]

Dynamic stochastic general equilibrium (DSGE) models
are a prominent tool for forecasting at central banks, and the competitive
forecasting performance of these models relative to alternatives, including
official forecasts, has been documented. When evaluating DSGE models on
an absolute basis, however, we find that the benchmark estimated mediumscale
DSGE model forecasts inflation and GDP growth very poorly, although
statistical and judgmental forecasts do equally poorly. Our finding is the
DSGE model analogue of the literature documenting the recent poor performance
of macroeconomic forecasts relative to simple naive forecasts since the
onset of the Great Moderation. Although this finding is broadly consistent
with the DSGE model we employ—the model itself implies that especially
under strong monetary policy, inflation deviations should be unpredictable—a
“wrong” model may also have the same implication. We therefore argue that
forecasting ability during the Great Moderation is not a good metric by which
to judge models.