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DSGE model-based forecasting of modelled and nonmodelled inflation variables in South Africa

Rangan Gupta (), Patrick T. Kanda, Mampho P. Modise and Alessia Paccagnini

Open Access publications from School of Economics, University College Dublin

Abstract: Inflation forecasts are a key ingredient for monetary policy-making – especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, for example alternative measures of inflation that might be of interest to policy-makers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4 and generate recursive forecasts over 2000Q1 to 2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and nonmodelled) in comparison with forecasts reported by other models such as AR(1). In addition, based on ex-ante forecasts over the period 2012Q1–2013Q4, we find that the DSGE model performs better than the AR(1) counterpart in forecasting actual GDP deflator inflation.

Keywords: DSGE model; Inflation; Core variables; Noncore variables (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 E27 E47 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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Published in: Applied Financial Economics, 47(3) 2015

Downloads: (external link)
http://hdl.handle.net/10197/7351 Open Access version, 2015 (application/pdf)

Related works:
Journal Article: DSGE model-based forecasting of modelled and nonmodelled inflation variables in South Africa (2015) Downloads
Working Paper: DSGE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa (2013)
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