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Forecasting macroeconomic variables in a small open economy: a comparison between small- and large-scale models

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  • Rangan Gupta

    (Department of Economics, University of Pretoria, South Africa)

  • Alain Kabundi

    (Department of Economics and Econometrics, University of Johannesburg, South Africa)

Abstract

This paper compares the forecasting ability of five alternative types of models in predicting four key macroeconomic variables, namely, per capita growth rate, the CPI inflation, the money market rate, and the growth rate of the nominal effective exchange rate for the South African economy. Unlike the theoretical small open economy new Keynesian dynamic stochastic general equilibrium, the unrestricted VAR, and the small-scale Bayesian vector autoregressive models, which are estimated based on four variables, dynamic factor models and the large-scale BVAR models use information from a data-rich environment containing 266 macroeconomic time series observed over the period 1983:01 to 2002:04. The results, based on root mean square errors, for one- to eight-quarter-ahead out-of-sample forecasts over the horizon of 2003:01 to 2006:04, show that, except for the growth rate of the of nominal effective exchange rate, large-scale BVARs outperform the other four types of models consistently and, generally, significantly. Copyright © 2010 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 29 (2010)
Issue (Month): 1-2 ()
Pages: 168-185

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Handle: RePEc:jof:jforec:v:29:y:2010:i:1-2:p:168-185

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Cited by:
  1. Karlsson, Sune, 2012. "Forecasting with Bayesian Vector Autoregressions," Working Papers 2012:12, Örebro University, School of Business.
  2. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2011. "Housing, consumption and monetary policy: How different are the US and the euro area?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3019-3041, November.
  3. Rangan Gupta & Alain Kabundi & Stephen M. Miller, 2009. "Using Large Data Sets to Forecast Housing Prices: A Case Study of Twenty US States," Working Papers 0916, University of Nevada, Las Vegas , Department of Economics.
  4. Annari de Waal & Renee van Eyden & Rangan Gupta, 2013. "Do we need a global VAR model to forecast inflation and output in South Africa?," Working Papers 201346, University of Pretoria, Department of Economics.
  5. Goodness C. Aye & Mehmet Balcilar & Adel Bosch & Rangan Gupta & Francois Stofberg, 2013. "The out-of-sample forecasting performance of non-linear models of real exchange rate behaviour: The case of the South African Rand," Working Papers 201304, University of Pretoria, Department of Economics.
  6. Gupta, Rangan & Steinbach, Rudi, 2013. "A DSGE-VAR model for forecasting key South African macroeconomic variables," Economic Modelling, Elsevier, vol. 33(C), pages 19-33.
  7. Rangan Gupta, 2012. "Forecasting House Prices for the Four Census Regions and the Aggregate US Economy: The Role of a Data-Rich Environment," Working Papers 201214, University of Pretoria, Department of Economics.
  8. Bekiros, Stelios, 2014. "Forecasting with a state space time-varying parameter VAR model: Evidence from the Euro area," Economic Modelling, Elsevier, vol. 38(C), pages 619-626.
  9. Rangan Gupta & Rudi Steinbach, 2010. "Forecasting Key Macroeconomic Variables of the South African Economy: A Small Open Economy New Keynesian DSGE-VAR Model," Working Papers 201019, University of Pretoria, Department of Economics.
  10. Mirriam Chitalu Chama-Chiliba & Rangan Gupta & Nonophile Nkambule & Naomi Tlotlego, 2011. "Forecasting Key Macroeconomic Variables of the South African Economy Using Bayesian Variable Selection," Working Papers 201132, University of Pretoria, Department of Economics.
  11. Mehmet Balcilar & Rangan Gupta & Kevin Kotze, 2013. "Forecasting South African Macroeconomic Data with a Nonlinear DSGE Model," Working Papers 201313, University of Pretoria, Department of Economics.
  12. Riane de Bruyn & Rangan Gupta & Renee van Eyden, 2013. "Forecasting The Rand-Dollar And Rand-Pound Exchange Rates Using Dynamic Model Averaging," Working Papers 201307, University of Pretoria, Department of Economics.

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