A DSGE-VAR model for forecasting key South African macroeconomic variables |
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| Institution: | 1. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;2. Macro Models Unit, Research Department, South African Reserve Bank, South Africa;1. Federal Reserve Bank of Cleveland, 1455 East 6th Street Cleveland, OH 44114, USA;2. Bank of Portugal, Economics and Research Department, Av. Almirante Reis 71, Lisbon 1150-012, Portugal;3. Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, CA 94120-7702, USA;4. European Central Bank - Directorate General Research - Monetary Policy Research, Kaiserstrasse 29, Frankfurt am Main D-60311, Germany;1. Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey;2. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;3. School of Economics, University of Cape Town, Private Bag, Rondebosch 7701, South Africa |
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| Abstract: | The paper develops a Small Open Economy New Keynesian DSGE-VAR (SOENKDSGE-VAR) model of the South African economy, characterised by incomplete pass-through of exchange rate changes, external habit formation, partial indexation of domestic prices and wages to past inflation, and staggered price and wage setting. The model is estimated using Bayesian techniques on data from the period 1980Q1 to 2003Q2, and then used to forecast output, inflation and nominal short-term interest rate for one-to eight-quarters-ahead over an out-of sample horizon of 2003Q3 to 2010Q4. When the forecast performance of the SOENKDSGE-VAR model is compared with an independently estimated DSGE model, the classical VAR and six alternative BVAR models, we find that, barring the BVAR model based on the SSVS prior on both VAR coefficients and the error covariance, the SOENKDSGE-VAR model is found to perform competitively, if not, better than all the other VAR models. |
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