Forecasting ability and the impacts of monetary policy and exchange rate shocks: comparisons between DSGE and VAR models estimated for Brazil

Abstract

This article compares the out-of-sample forecasting ability of a new Keynesian DSGE (Dynamic Stochastic General Equilibrium) model, specified and estimated for Brazil, with a Vector Autoregression (VAR). The article innovates in relation to other similar studies made for Brazil (Castro et al. (2011) e Caetano e Moura (2013), by choosing a specification for the DSGE model that, allowing the use of a richer information set, made possible to compute the predictive ability of the DSGE from forecasts that are, truly, out-of-sample forecasts. Moreover, unlike other articles that used Brazilian data, it also verifies to what degree the responses of variables to a monetary and an exchange rate shock. The estimated DSGE model is similar to the ones adopted by Justiniano e Preston (2005) and Alpanda (2009, 2010a, 2010b). The BVAR model was estimated using a Bayesian procedure like those proposed by Sims and Zha (1998) and Rubio-Ramíres, Waggoner and Zha (2005). The results show that the estimated DSGE model is capable of making out-of-sample forecasts, for some variables, that are competitive when compared to a VAR model.