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Forecasting the South African Economy with VARs and VECMs

Rangan Gupta ()

No 200618, Working Papers from University of Pretoria, Department of Economics

Abstract: The paper develops a Bayesian Vector Error Correction Model (BVECM) of the South African economy for the period of 1970:1-2000:4 and forecasts GDP, consumption, investment, short-term and long term interest rates, and the CPI. We find that a tight prior produces relatively more accurate forecasts than a loose one. The out-of-sample-forecast accuracy resulting from the BVECM is compared with those generated from the Classical variant of the VAR and VECM and the Bayesian VAR. The BVECM is found to produce the most accurate out of sample forecasts. It also correctly predicts the direction of change in the chosen macroeconomic indicators.

Keywords: VECM and BVECM; VAR and BVAR Model; Forecast Accuracy; BVECM (search for similar items in EconPapers)
JEL-codes: E17 E27 E37 E47 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006-08
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