Staff Reports
DSGE Forecasts of the Lost Recovery
Number 844
March 2018

JEL classification: C11, C32, C54, E43, E44

Authors: Michael Cai, Marco Del Negro, Marc P. Giannoni, Abhi Gupta, Pearl Li, and Erica Moszkowski

The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated a policy environment without precedents. We document the real real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using the pseudo real-time forecasting performance results from a battery of DSGE models. We find the New York Fed DSGE model’s forecasting accuracy to be comparable to that of private forecasters—and notably better, for output growth, than the median forecasts from the FOMC’s Summary of Economic Projections. The model’s financial frictions were key in obtaining these results, as they implied a slow recovery following the financial crisis.

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AUTHOR DISCLOSURE STATEMENT(S)
Michael Cai
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of New York.

Marco Del Negro
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of New York.

Marc P. Giannoni
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of Dallas and was an employee of the Federal Reserve Bank of New York while working on this project.

Abhi Gupta
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of New York.

Pearl Li
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of New York.

Erica Moszkowski
The author declares that she has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author was an employee of the Federal Reserve Bank of New York while working on this project.