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

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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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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
Date of revision:
Handle: RePEc:nzb:nzbdps:2007/01

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  12. Adolfson, Malin & Lindé, Jesper & Villani, Mattias, 2005. "Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 190, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
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Cited by:
  1. Özer Karagedikli & Troy Matheson & Christie Smith & Shaun Vahey, 2008. "RBCs and DSGEs: The Computational Approach to Business Cycle Theory and Evidence," Working Paper, Norges Bank 2008/17, Norges Bank.
  2. Marcin Kolasa & Michał Rubaszek & Paweł Skrzypczyński, 2012. "Putting the New Keynesian DSGE Model to the Real‐Time Forecasting Test," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44(7), pages 1301-1324, October.
  3. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2009. "A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-10, Board of Governors of the Federal Reserve System (U.S.).
  4. Michael Wickens, 2014. "How Useful are DSGE Macroeconomic Models for Forecasting?," Open Economies Review, Springer, Springer, vol. 25(1), pages 171-193, February.
  5. Gregor Bäuerle & Tobias Menz, 2008. "Monetary Policy in a Small Open Economy Model: A DSGE-VAR Approach for Switzerland," Working Papers, Swiss National Bank, Study Center Gerzensee 08.03, Swiss National Bank, Study Center Gerzensee.
  6. Julien Albertini & Güneş Kamber & Michael Kirker, 2012. "Estimated Small Open Economy Model With Frictional Unemployment," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 17(2), pages 326-353, 05.
  7. Rochelle M. Edge & Refet S. Gurkaynak, 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 209-259.
  8. Paul Hubert, 2011. "Do central banks forecast influence private agents ? Forecasting performance vs. signals," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2011-20, Observatoire Francais des Conjonctures Economiques (OFCE).
  9. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers, University of Milano-Bicocca, Department of Economics 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.
  10. Rochelle M. Edge & Refet S. Gurkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-11, Board of Governors of the Federal Reserve System (U.S.).
  11. Jaromír Beneš & Andrew Binning & Kirdan Lees, 2008. "Incorporating judgement with DSGE models," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2008/10, Reserve Bank of New Zealand.
  12. Andrew Hodge & Tim Robinson & Robyn Stuart, 2008. "A Small BVAR-DSGE Model for Forecasting the Australian Economy," RBA Research Discussion Papers, Reserve Bank of Australia rdp2008-04, Reserve Bank of Australia.
  13. Yuliya Rychalovska & Massimiliano Marcellino (EUI), 2013. "An estimated DSGE model of a Small Open Economy within the Monetary Union: Forecasting and Structural Analysis," EcoMod2013, EcoMod 5302, EcoMod.
  14. 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, University of Pretoria, Department of Economics 201019, University of Pretoria, Department of Economics.
  15. Marek Rusnak, 2013. "Nowcasting Czech GDP in Real Time," Working Papers, Czech National Bank, Research Department 2013/06, Czech National Bank, Research Department.

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