DSGE models should include housing supply, ECB paper argues
Author says adding financial sector and new houses improves forecasting accuracy
Adding endogenous housing supply to macroeconomic models significantly improves their forecasting perfomance, a working paper published by the European Central Bank says.
In The effect of new housing supply in structural models: a forecasting performance evaluation, Stefan Girstmair says economists have largely failed to do this. Before the global financial crisis, economists’ dynamic stochastic general equilibrium (DSGE) models rarely included the real estate and financial sectors, Girstmair
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