New method revolutionizes forecasting, improving accuracy of economic models.
Dynamic Stochastic General Equilibrium (DSGE) models are popular for both theory and real-world applications. Researchers are exploring ways to evaluate how well these models fit real data. By applying a concept called statistical identification, they found that a new evaluation method for DSGE models may not meet the necessary conditions. However, using a different benchmark called FAVAR still supports the DSGE model's fit to the data. This suggests that a combination of DSGE and FAVAR could be a good model for forecasting.