Marginalized Predictive Likelihood Comparisons of Linear Gaussian State-Space Models with Applications to DSGE, DSGE-VAR, and VAR Models
The predictive likelihood is useful for ranking models in forecast comparison exercises using Bayesian inference. We discuss how it can be estimated, by means of marginalization, for any subset of the observables in linear Gaussian state-space models. We compare macroeconomic density forecasts for the euro area of a DSGE model to those of a DSGE-VAR, a BVAR, and a multivariate random walk over 1999Q1–2011Q4. While the BVAR generally provides superior forecasts, its performance deteriorates substantially with the onset of the Great Recession. This is particularly notable for longerhorizon real GDP forecasts, where the DSGE and DSGE-VAR models perform better.