Indeterminacy and Forecastability

Ippei Fujiwara, Yasuo Hirose

    Research output: Contribution to journalArticle

    Abstract

    Recent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky-price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large.
    Original languageEnglish
    Pages (from-to)243-251
    JournalJournal of Money, Credit and Banking
    Volume46
    Issue number1
    DOIs
    Publication statusPublished - 2014

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