Economics Research Seminar Series 02-2020

Topic: An Evaluation Of The Forecast Performance Of DSGE And VAR Models: The Case Of A Developing Country. By Shahzad Ahmad and Adnan Haider

Presenter: Shahzad Ahmad Presenter: Shahzad Ahmad is a PhD student at Institute of Business Administration, Karachi. Mr. Ahmad is also Dy. Director at Financial Stability Department, State Bank of Pakistan where he is a member of Macro Stress Testing Team and contributes in SBP annual publication Financial Stability Review. Prior to his current assignment in Financial Stability, he has been a member of SBP Economic Modeling Team. He has contributed in development of SBP Forecasting and Policy Analysis System (FPAS), which is currently being used for forecasting and scenario analysis during monetary policy deliberations.


Abstract: This paper estimates a DSGE model and three versions of VAR models (VARX, BVARX and BVAR) to analyze forecasting performance of these models in context of Pakistan. VAR models and a medium-scale DSGE model are estimated using quarterly data (1980Q4- 2017Q2). Expanding window recursive out-of-sample forecasts for GDP growth, call money rate, CPI in action and percent change in exchange rate are generated and compared over the period 2009Q1-2017Q2. Forecasting performance is analyzed by the comparison of bias and root mean squared errors (RMSE). Analysis of forecasting performance over 1-8 quarters forecast horizon reveals that BVAR model provides relatively better forecast in case of GDP growth, interest rate and in action while BVARX provides more accurate forecast in case of exchange rate. Structural interpretation of DSGE forecast errors reveals that there has been unutilized growth potential in economic activity. This slack in economic activity might be attributable to unnecessarily high interest rate and overvalued exchange rate.

Date: 7th February 2020
Time: 11:30 AM
Venue: MCS 5, Aman CED Building, IBA, Karachi


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