Monday, September 29, 2014

Jason versus the New York Fed DSGE model

A research group at the NY Fed has released some forecasting results [1] with their DSGE model, so here's a comparison with the information transfer model (ITM). The Fed results are in red (and observations in black), and the ITM is blue with gray error bands (in both cases the errors are the 70 and 90% confidence limits). These are both quarterly models/error estimates, but the data (shown in green) is the monthly data so the data should show a bit more spread. Here is the graph:

As a side note, the ITM is essentially linear extrapolation at this short scale. Well, short for the ITM. The prediction does turn into a shallower curve as it nears zero inflation rate (about 0.3%) as you head out towards 2050 (think Japan). However, the assumptions of log-linear extrapolation of NGDP and currency base will probably fail before then.

As for the relative simplicities of the two models, well there's this (on the left is the FRBNY DSGE model and on the right is the ITM):

Sorry, I couldn't help myself. But really ... 29 parameters [pdf] versus 2.

Update (2:45pm PDT): forgot a H/T to Mark Thoma.

[1] They are careful to say that these are not official Fed forecasts, but rather for research purposes.


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