Forecasting and Policy Making (Paper) - Center for Financial Studies

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Figure 10 displays forecasts for quarterly real output growth, consumption and investment. The
Quarterly annualized real output growth
2007 2008 2009 2010 2011
Quarterly annualized real investment growth
2007 2008 2009 2010 2011
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Quarterly annualized real consumption growth
2007 2008 2009 2010 2011
Figure 10: Data (black line) and forecasts (blue lines) of annualized real output growth, annualized real consumption growth, annualized
real investment growth and the level of external spending. The former three variables are observed in the data, while the latter is estimated
using the Kalman Filter.
output growth forecasts are roughly similar to those computed with the small structural IMF model
in the previous section. There is a strong comovement of output, consumption and investment. The
fluctuations of investment growth are much larger than those of consumption growth. The model
cannot predict the large recession in 2008/2009 and tends to predict a relatively quick return to the
balanced growth part in 2008Q3 while the recession actually deepened. Once the turning point has
been reached in 2008Q4 the recovery is predicted quite well (see Wieland and Wolters, 2011, for
a detailed analysis of the predictive ability of DSGE models around turning points). Forecasts are
quite accurate from 2009 onwards even though growth turned out to be somewhat lower in 2010 than
predicted by the model.
The forecast for investment is extremely persistent. Investment is predicted slightly below 12
percent for 2011 and decreases afterwards slowly to the much lower investment steady state growth
rate. Steady-state investment growth equals the steady state output growth rate of about 2.4 percent.
The high degree of persistence can be explained by the discrepancy between the average output growth
rate and the much higher observed average investment growth rate in the data. The model enforces
that both time series have the same steady state value leading to a very high persistence in investment
to fit the actual data series.
Figure 11 displays forecasts for annualized quarterly inflation and the federal funds rate. 34 The
model cannot predict the spikes in inflation in 2008 and overpredicts inflation from 2009 to the end of
two-sided filter uses information about data points in the future.
34 The inflation rate is not directly comparable to the IMF model because the IMF model uses the CPI inflation rate, while
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