Econometric Tools for Macroeconomic Forecasting and Simulation
The aim of this research group is to enhance research on, and development, implementation, evaluation, and application of quantitative macroeconometric models for forecasting and analysing aggregate economic fluctuations and developments. Research in this group contributes to the econometric foundation and the methodological improvements of the IWH forecasts. During the last years, the IWH has highly specialised in macroeconomic modelling, both for flash estimates and medium-term projections. Furthermore, this group conducts comprehensive empirical analysis and develops econometric tools that are used for third-party funded projects. In the last years, particular models have been developed for e.g. Volkswagen Financial Services AG and for GIZ. The research group contributed in particular on macroeconomic modelling for ministries in Kyrgyzstan and Tajikistan as well as for the institute of forecasting and macroeconomic research (IFMR) Uzbekistan.
IWH Data Project: IWH Real-time Database
Research Cluster
Economic Dynamics and StabilityYour contact
EXTERNAL FUNDING
07.2022 ‐ 12.2026
Evaluation of the InvKG and the federal STARK programme
German Federal Ministry for Economic Affairs and Climate Action
On behalf of the Federal Ministry of Economics and Climate Protection, the IWH and the RWI are evaluating the use of the approximately 40 billion euros the federal government is providing to support the coal phase-out regions..
10.2019 ‐ 01.2023
Climate Resilient Economic Development
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
Climate change has a substantial impact on economic growth and a country’s development. This increases the need for reliable and viable approaches to assessing the impact of climate risks and potential adaptation scenarios. Political decision-makers in ministries of planning and economy need sound forecasts in order to design and finance adequate economic policy instruments and actively to take countermeasures. In the pilot countries (Georgia, Kazakhstan and Vietnam), climate risk is included in macroeconomic modelling, enabling the results to be integrated into the policy process so as to facilitate adapted economic planning. The IWH team is responsible for macroeconomic modelling in Vietnam.
05.2020 ‐ 09.2023
ENTRANCES: Energy Transitions from Coal and Carbon: Effects on Societies
European Commission
ENTRANCES aims at examining the effects of the coal phase-out in Europe. How does the phase-out transform society – and what can politics do about it?
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 883947.
01.2018 ‐ 12.2023
EuropeAid (EU Framework Contract)
European Commission
07.2016 ‐ 12.2018
Climate Protection and Coal Phaseout: Political Strategies and Measures up to 2030 and beyond
Umweltbundesamt (UBA)
01.2017 ‐ 12.2017
Support to Sustainable Economic Development in Selected Regions of Uzbekistan
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
01.2017 ‐ 12.2017
Short-term Macroeconomic Forecasting Model in Ministry of Economic Development and Trade of Ukraine
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
01.2016 ‐ 12.2017
Development of analytical tools based on Input-Output table
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
The aim of the project was the development of an analytical tool to assess the gains and losses of possible state programs supporting the development of the private sector of the Tajik economy.
11.2015 ‐ 12.2016
Employment and Development in the Republic of Uzbekistan
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
Support to sustainable economic development in selected regions of Uzbekistan
05.2016 ‐ 05.2016
Framework and Finance for Private Sector Development in Tajikistan
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
02.2016 ‐ 04.2016
Macroeconomic Reforms and Green Growth - Assessment of economic modelling capacity in Vietnam
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
Refereed Publications
Should Forecasters Use Real‐time Data to Evaluate Leading Indicator Models for GDP Prediction? German Evidence
in: German Economic Review, No. 4, 2019
Abstract
In this paper, we investigate whether differences exist among forecasts using real‐time or latest‐available data to predict gross domestic product (GDP). We employ mixed‐frequency models and real‐time data to reassess the role of surveys and financial data relative to industrial production and orders in Germany. Although we find evidence that forecast characteristics based on real‐time and final data releases differ, we also observe minimal impacts on the relative forecasting performance of indicator models. However, when obtaining the optimal combination of soft and hard data, the use of final release data may understate the role of survey information.
Expectation Formation, Financial Frictions, and Forecasting Performance of Dynamic Stochastic General Equilibrium Models
in: Historical Social Research, No. 2, Special Issue: Governing by Numbers 2019
Abstract
In this paper, we document the forecasting performance of estimated basic dynamic stochastic general equilibrium (DSGE) models and compare this to extended versions which consider alternative expectation formation assumptions and financial frictions. We also show how standard model features, such as price and wage rigidities, contribute to forecasting performance. It turns out that neither alternative expectation formation behaviour nor financial frictions can systematically increase the forecasting performance of basic DSGE models. Financial frictions improve forecasts only during periods of financial crises. However, traditional price and wage rigidities systematically help to increase the forecasting performance.
For How Long Do IMF Forecasts of World Economic Growth Stay Up-to-date?
in: Applied Economics Letters, No. 3, 2019
Abstract
This study analyses the performance of the International Monetary Fund (IMF) World Economic Outlook output forecasts for the world and for both the advanced economies and the emerging and developing economies. With a focus on the forecast for the current year and the next year, we examine the durability of IMF forecasts, looking at how much time has to pass so that IMF forecasts can be improved by using leading indicators with monthly updates. Using a real-time data set for GDP and for indicators, we find that some simple single-indicator forecasts on the basis of data that are available at higher frequency can significantly outperform the IMF forecasts as soon as the publication of the IMF’s Outlook is only a few months old. In particular, there is an obvious gain using leading indicators from January to March for the forecast of the current year.
Should We Use Linearized Models To Calculate Fiscal Multipliers?
in: Journal of Applied Econometrics, No. 7, 2018
Abstract
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the di¤erence. Our results caution against the common practice of using linearized models to calculate scal multipliers in long-lived liquidity traps.
On DSGE Models
in: Journal of Economic Perspectives, No. 3, 2018
Abstract
The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policymakers is how to assess the relative strength of those forces. Economists have a range of tools that can be used to make such assessments. Dynamic stochastic general equilibrium (DSGE) models are the leading tool for making such assessments in an open and transparent manner. We review the state of mainstream DSGE models before the financial crisis and the Great Recession. We then describe how DSGE models are estimated and evaluated. We address the question of why DSGE modelers—like most other economists and policymakers—failed to predict the financial crisis and the Great Recession, and how DSGE modelers responded to the financial crisis and its aftermath. We discuss how current DSGE models are actually used by policymakers. We then provide a brief response to some criticisms of DSGE models, with special emphasis on criticism by Joseph Stiglitz, and offer some concluding remarks.
Working Papers
Disentangling Covid-19, Economic Mobility, and Containment Policy Shocks
in: IWH Discussion Papers, No. 2, 2021
Abstract
We study the dynamic impact of Covid-19, economic mobility, and containment policy shocks. We use Bayesian panel structural vector autoregressions with daily data for 44 countries, identified through sign and zero restrictions. Incidence and mobility shocks raise cases and deaths significantly for two months. Restrictive policy shocks lower mobility immediately, cases after one week, and deaths after three weeks. Non-pharmaceutical interventions explain half of the variation in mobility, cases, and deaths worldwide. These flattened the pandemic curve, while deepening the global mobility recession. The policy tradeoff is 1 p.p. less mobility per day for 9% fewer deaths after two months.
Exchange Rates and the Information Channel of Monetary Policy
in: IWH Discussion Papers, No. 17, 2020
Abstract
We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.
Integrated Assessment of Epidemic and Economic Dynamics
in: IWH Discussion Papers, No. 4, 2020
Abstract
In this paper, a simple integrated model for the joint assessment of epidemic and economic dynamics is developed. The model can be used to discuss mitigation policies like shutdown and testing. Since epidemics cause output losses due to a reduced labor force, temporarily reducing economic activity in order to prevent future losses can be welfare enhancing. Mitigation policies help to keep the number of people requiring intensive medical care below the capacity of the health system. The optimal policy is a mixture of temporary partial shutdown and intensive testing and isolation of infectious persons for an extended period of time.
How Forecast Accuracy Depends on Conditioning Assumptions
in: IWH Discussion Papers, No. 18, 2019
Abstract
This paper examines the extent to which errors in economic forecasts are driven by initial assumptions that prove to be incorrect ex post. Therefore, we construct a new data set comprising an unbalanced panel of annual forecasts from different institutions forecasting German GDP and the underlying assumptions. We explicitly control for different forecast horizons to proxy the information available at the release date. Over 75% of squared errors of the GDP forecast comove with the squared errors in their underlying assumptions. The root mean squared forecast error for GDP in our regression sample of 1.52% could be reduced to 1.13% by setting all assumption errors to zero. This implies that the accuracy of the assumptions is of great importance and that forecasters should reveal the framework of their assumptions in order to obtain useful policy recommendations based on economic forecasts.
Progressive Tax-like Effects of Inflation: Fact or Myth? The U.S. Post-war Experience
in: IWH Discussion Papers, No. 33, 2017
Abstract
Inflation and earnings growth can push some tax payers into higher brackets in the absence of inflation-indexed schedules. Moreover, inflation may affect the composition of individuals’ income sources. As a result, depending on the relative tax burden of labour and capital, inflation may decrease or increase the difference between before-tax and after-tax income. However, whether some and if so which percentiles of the income distribution net benefit from inflation via taxation is a widely unexplored question. We make use of a novel dataset on U.S. pre-tax and post-tax income distribution series provided by Pike ty et al. (2018) for the years 1962 to 2014 to answer this question. To this end, we estimate local projections to quantify dynamic effects. We find that inflation shocks increase progressivity of taxation not only contemporaneously but also with some repercussion of several years after the shock. While particularly the bottom two quintiles gain in share, it is not the top but the fourth quintile that lastingly loses.