Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models

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Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models

Author Info

Rangan Gupta () (Department of Economics, University of Pretoria)
Alain Kabundi () (Department of Economics and Econometrics, University of Johannesburg)

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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 of 1983:01 to 2002:04. The results, based on Root Mean Square Errors, for one- to eight-quarters-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.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200830.

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Length: 17 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:pre:wpaper:200830

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-09-20 (All new papers)
NEP-CBA-2008-09-20 (Central Banking)
NEP-ECM-2008-09-20 (Econometrics)
NEP-ETS-2008-09-20 (Econometric Time Series)
NEP-FOR-2008-09-20 (Forecasting)
NEP-MAC-2008-09-20 (Macroeconomics)

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
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Other versions:
- Rangan Gupta & Moses M. Sichei, 2006. "A BVAR Model for the South African Economy," Working Papers 200612, University of Pretoria, Department of Economics.
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, 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.)

Sonali Das & Rangan Gupta & Alain Kabundi, 2008. "Could We Have Predicted The Recent Downturn In The South African Housing Market?," Working Papers 200831, University of Pretoria, Department of Economics.
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 2009-13, University of Connecticut, Department of Economics. [Downloadable!]
Other versions:
- 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. [Downloadable!]
- 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 200912, University of Pretoria, Department of Economics. [Downloadable!]
Sonali Das & Rangan Gupta & Alain Kabundi, 2009. "The Blessing Of Dimensionality In Forecasting Real House Price Growth In The Nine Census Divisions Of The Us," Working Papers 200902, University of Pretoria, Department of Economics.

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