Smets and Wouters model estimated with skewed shocks - empirical study of forecasting properties

Grzegorz Koloch

No 2016-023, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: In this paper we estimate a Smets and Wouters (2007) model with shocks following a closed skew normal distribution (csn) introduced in Gonzalez-Farias et al. (2004), which nests a normal distribution as a special case. In the paper we discuss priors for model parameters, including skewness-related parameters of shocks, i.e. location, scale and skewness parameters. Using data ranging from 1991Q1 to 2012Q2 we estimate the model and recursively verify its out-of sample forecasting properties for time period 2007Q1 - 2012Q2, therefore including the recent financial crisis, within a forecasting horizon from 1 up to 8 quarters ahead. Using a RMSE measure we compare the forecasting performance of the model with skewed shocks wit a model estimated using normally distributed shocks. We find that inclusion of skewness can help forecasting some variables (consumption, investment and hours worked), but, on the other hand, results in deterioration in the other ones (output, inflation wages and the short rate).

Keywords: DSGE; Forecasting; Closed Skew-Normal Distribution (search for similar items in EconPapers)
JEL-codes: C13 C51 E32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-12
New Economics Papers: this item is included in nep-dge, nep-ecm, nep-for and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2016023

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