Testing a DSGE model and its partner database

Abstract

There is now an impetus to apply dynamic stochastic general equilibrium models to forecasting.But these models typically rely on purpose-built data, for example on tradable and nontradable sector outputs.How then do we know that the model will forecast well, in advance?We develop an early warning test of the database-model match and apply that to a Colombian model.Our test reveals where the combination should work (consumption) and where not (in investment).The test can be adapted to look at many likely sources of DSGE model failure.

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