Forecasting with instabilities: An application to DSGE models with financial frictions

We assess the importance of parameter instabilities from a forecasting viewpoint in a set of medium-scale DSGE models with and without financial frictions using US real-time data. We find that, first, failing to update DSGE model parameter estimates with new data arrival deteriorates point forecasts due to the estimated parameters variation. And second, the presence of financial frictions helps to better address, city, state, ZIP code, province, country with country codes for all authors.