Template-Type: ReDIF-Paper 1.0 
Title: Does foreign sector help forecast domestic variables in DSGE models?
Author-Name: Marcin Kolasa 
Author-Name: Michał Rubaszek 
Abstract: This paper evaluates the forecasting performance of several small open economy DSGEmodels relative to a closed economy benchmark using a long span of data for Australia,Canada and the United Kingdom. We find that opening the economy does not improve,and even deteriorates the quality of point and density forecasts for key domesticvariables. We show that this result can be to a large extent attributed to an increasein forecast error due to a more sophisticated structure of the extended setup. Thisclaim is based on a Monte Carlo experiment, in which an open economy model fails toconsistently beat its closed economy benchmark even if it is the true data generatingprocess.
Number: 2016-022
Length: 30 pages 
Creation-Date: 2016-12
Keywords: forecasting, DSGE models, New Open Economy Macroeconomics, Bayesian estimation
Classification-JEL: D58, E17, F41, F47
File-URL: https://hdl.handle.net/20.500.12182/1154
File-Format: Application/pdf
DOI: 10.33119/kaewps2016022
Handle: RePEc:sgh:kaewps:2016022