VAR-ing the economy of the Netherlands

Jan Jacobs and Albert Van der Horst ()

No 24, Working Papers from Centre for Economic Research, University of Groningen and University of Twente

Abstract: This paper adopts the vector autoregression (VAR) approach to modelling the economy of the Netherlands. A VAR system with four endogenous variables---gross domestic product, inflation, the capital market interest rate and the money market interest rate---is built. The small, open character of the Dutch economy suggests the inclusion of foreign exogenous variables, so we also construct a VARX system (with world trade and the German capital market and money market rates as exogenous variables). Both the VAR system and the VARX system are estimated with error-correction mechanisms to take proper account of the non-stationarity of the variables. The VAR system and the VARX system are compared to the IBS-CCSO model, a structural macroeconometric model of the economy of the Netherlands. Compared to the IBS-CCSO model, the VAR system gives better results for production and inflation, whereas the structural macroeconometric IBS-CCSO model is to be preferred for the interest rates. The VARX system outperforms not only the VAR system but also the IBS-CCSO model.

Keywords: vector autoregression; forecast comparison (search for similar items in EconPapers)
JEL-codes: C32 C53 (search for similar items in EconPapers)
Date: 1996-01
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