Paper #1437

Title:

Model comparisons in unstable environments

Authors:

Raffaella Giacomini and Barbara Rossi

Date:

August 2014 (Revised: January 2015)

Abstract:

The goal of this paper is to develop formal tests to evaluate the relative in-sample per- formance of two competing, misspecified, non-nested models in the presence of possible data instability. Compared to previous approaches to model selection, which are based on measures of global performance, we focus on the local relative performance of the models. We propose three tests that are based on different measures of local performance and that correspond to different null and alternative hypotheses. The empirical application provides insights into the time variation in the performance of a representative DSGE model of the European economy relative to that of VARs.

Keywords:

Model Selection Tests, Misspeci.cation, Structural Change, Kullback-Leibler Information Criterion

JEL codes:

C22, C52, C53

Area of Research:

Macroeconomics and International Economics

Published in:

International Economic Review, 57(2), 335-756, May 2016

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