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Empirical Economics

, Volume 56, Issue 4, pp 1283–1323 | Cite as

Estimating and forecasting with a two-country DSGE model of the Euro area and the USA: the merits of diverging interest-rate rules

  • Ulrich GunterEmail author
Article
  • 96 Downloads

Abstract

In this paper we estimate and forecast with a small-scale DSGE model of the Euro area and the USA characterized by diverging interest-rate rules using quarterly data from 1996Q2 to 2011Q2. These diverging rules reflect the differing mandates of the ECB and the Fed, respectively. Due to its primary objective of price stability, the ECB is supposed to conduct monetary policy by considering producer-price inflation only (single mandate), whereas the Fed is assumed to conduct its policy by taking into account the output gap in addition to producer-price inflation (dual mandate). In terms of the RMSE and the MAE, the DSGE model with diverging interest-rate rules outperforms a DSGE model with identical interest-rate rules in almost 70% of all cases for almost all variables across forecast horizons out of sample. It also compares well with BVAR benchmarks. For shorter horizons, we find some statistically significant differences in forecast accuracy between rival models. For forecast horizons three and four quarters ahead, the null hypothesis of equal forecast accuracy can seldom be rejected.

Keywords

Central bank mandates DSGE models Forecast evaluation Monetary policy Open-economy macroeconomics 

JEL Classification

E47 E52 E58 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of Tourism and Service ManagementMODUL University ViennaViennaAustria

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