Bayesian forecasting of U.S. recessions using new Keynesian models with heterogeneous expectations

Abstract

ABSTRACT In this paper, the Bayesian point forecasting performances of small-scale and medium-scale New Keynesian models, each augmented to include heterogeneous expectations via the Euler equation adaptive learning method, are compared to their homogeneous expectations counterparts during the three most recent U.S. recessions. Forecasting performance is assessed based on root mean squared error. Results show that, in general, the models with heterogeneous expectations forecast recessions better than their homogeneous expectations counterparts.