Forecasting Canadian time series with the New Keynesian model

This paper assesses the out‐of‐sample forecasting accuracy of the New Keynesian Model for Canada. We estimate a variant of the model on a series of rolling subsamples, computing out‐of‐sample forecasts one to eight quarters ahead at each step. We compare these forecasts with those arising from vector autoregression (VAR) models, using econometric tests of forecasting accuracy. We show that the forecasting accuracy of the New Keynesian Model compares favourably with that of the benchmarks, particularly as the forecasting horizon increases. These results suggest that the model could become a useful forecasting tool for Canadian time series.