Thursday, May 30, 2013

Andrew Lainton — No, the Negro DGSE model does not Predict the Great Recession

A great deal of chatter on the blogosphere on a paper by Negro, Giannoni and Schorfheide of the NY Fed that DGSE can predict the great recession. Noahopinion discusses it the day after he musedabout what use was DGSE.
What they do is take the most well known New Keynsian model Smets-Wouters (2007) New Keynesian model and add on the the “financial accelerator” model of Bernanke, Gertler, and Gilchrist (1999). In the Financial Accelerator model credit shocks transmit through the real economy through amongst other reasons undermining the value of collatoral.
Both Noah and Mark Thoma’s reaction is ‘pah’ we could have predicted the Great Recession all along, we knew how we just didnt put two and two together’. But the Negro et al. is not a ‘forecast’ had they had the model in 2007 they would not have predicted the Great Recession. This quite apart from the criticism made by some commentators that they have engaged in post-hoc calibration of parameters to fit the result. I don’t make that accusation simply that the result forecasts nothing because their baseline data....
Decisions, Decisions, Decisions,
No, the Negro DGSE model does not Predict the Great Recession
Andrew Lainton


Magpie said...

From the de Negro et al paper:

"3.1 DSGE Forecasts of the Great Recession
"We begin by estimating the DSGE model described in Section 2 based on macroeconomic data from 1964:Q1 to 2008:Q3."

That is, after both Bear Stearns and Lehmann Bros. had gone belly up.

Which goes to show that Smith not only is a crappy physicist-with-economics-envy, he can't read, either.

Clonal said...

The graph here - clearly shows that the Great recession started in early 2006

This is the graph of Motor Vehicle deaths recorded every year. A very clean post hoc marker of economic activity.

paul meli said...

We need to redefine "smart"...the definition we've been using is not working.