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Open economy DSGE-VAR forecasting and policy analysis - head to head with the RBNZ published forecasts

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Author Info
Kirdan Lees
Troy Matheson
Christie Smith (Reserve Bank of New Zealand)

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Abstract

We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts from a DSGE-VAR and a 'vanilla' DSGE model are competitive with, and in some dimensions superior to, the Reserve Bank of New Zealand's official forecasts. We also use the estimated DSGE-VAR structure to identify optimal policy rules that are consistent with the Reserve Bank's Policy Targets Agreement. Optimal policy rules under parameter uncertainty prove to be relatively similar to the certainty case. The optimal policies react aggressively to inflation and contain a large degree of interest rate smoothing, but place a low weight on responding to output or the change in the nominal exchange rate.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp07_01.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/01.

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Length: 26 p.
Date of creation: Jan 2007
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Handle: RePEc:nzb:nzbdps:2007/01

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Adolfson, Malin & Lindé, Jesper & Villani, Mattias, 2005. "Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model," Working Paper Series 190, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006. [Downloadable!]
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  3. Marco Del Negro & Frank Schorfheide, 2003. "Take your model bowling: forecasting with general equilibrium models," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 35-50. [Downloadable!]
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  6. Martin Fukac & Adrian Pagan, 2006. "Issues In Adopting Dsge Models For Use In The Policy Process," CAMA Working Papers 2006-10, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
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  9. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 707-734, 07. [Downloadable!] (restricted)
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  10. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand. [Downloadable!]
  11. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 497-510, December. [Downloadable!] (restricted)
  12. James L. Heckman, 1999. "Causal Parameters and Policy Analysis in Economcs: A Twentieth Century Retrospective," NBER Working Papers 7333, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July. [Downloadable!] (restricted)
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  14. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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  1. Jaromír Beneš & Andrew Binning & Kirdan Lees, 2008. "Incorporating judgement with DSGE models," Reserve Bank of New Zealand Discussion Paper Series DP2008/10, Reserve Bank of New Zealand. [Downloadable!]
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