Balanced Growth Approach to Tracking Recessions

Marta Boczon, Jean-Francois Richard*

*Corresponding author for this work

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Abstract

In this paper, we propose a hybrid version of Dynamic Stochastic General Equilibrium models with an emphasis on parameter invariance and tracking performance at times of rapid changes (recessions). We interpret hypothetical balanced growth ratios as moving targets for economic agents that rely upon an Error Correction Mechanism to adjust to changes in target ratios driven by an underlying state Vector AutoRegressive process. Our proposal is illustrated by an application to a pilot Real Business Cycle model for the US economy from 1948 to 2019. An extensive recursive validation exercise over the last 35 years, covering 3 recessions, is used to highlight its parameters invariance, tracking and 1- to 3-step ahead forecasting performance, outperforming those of an unconstrained benchmark Vector AutoRegressive model.
Original languageEnglish
Article number14
JournalEconometrics
Volume8
Issue number2
Number of pages35
ISSN2225-1146
DOIs
Publication statusPublished - Jun 2020
Externally publishedYes

Keywords

  • Hybrid model
  • VAR
  • DSGE
  • ECM
  • RBC

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