The Pros and Cons of Extending a DSGE Model with More Elaborated Foreign Blocks
| Authors | |
|---|---|
| Year of publication | 2015 |
| Type | Article in Proceedings |
| Conference | 33rd International Conference on Mathematical Methods in Economics (MME) |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | DSGE; foreign block; UIP condition; predictive ability |
| Description | This contribution aims at discussing various ways how foreign block can be modelled in a small open economy DSGE model (ranging from a reduced form VAR model to a QPM-style model of the foreign economy). These extensions are assessed mainly on ex-post forecasting performance. We find out that a QPM-style model can bring an improvement of predictive ability up to 20 percent. The necessary assumption for achieving it (for the Czech case) is, however, the autoregressive parameter of foreign interest rates very close to one what indicates model misspecification. Another and a very simple way how the predictive power of a DSGE model can be improved is a correct setting of parameter describing ' forward-lookiness' of the UIP condition. |