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An Empirical BVAR-DSGE Model of the Australian Economy

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  • Sean Langcake

    (Reserve Bank of Australia)

  • Tim Robinson

    (Reserve Bank of Australia)

Abstract

In this paper, we develop a multi-sector dynamic stochastic general equilibrium (DSGE) model with a simple commodity sector and assess whether forecasts from this model can be improved by using it as a prior for an empirical Bayesian vector autoregression (BVAR). We treat the world economy as being observed and exogenous to the small economy, rather than unobserved, as has been done in some previous studies, such as Hodge, Robinson and Stuart (2008) and Lees, Matheson and Smith (2011). We find that the forecasts from a BVAR that uses this DSGE model as a prior are generally more accurate than those from the DSGE model alone. Nevertheless, these forecasts do not outperform a small open economy VAR estimated using other standard priors or simple univariate benchmarks.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-07.

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Date of creation: Jun 2013
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Handle: RePEc:rba:rbardp:rdp2013-07

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Related research

Keywords: empirical Bayesian VAR; forecasting; small open economy;

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References

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  1. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
  2. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  3. John Geweke & Gianni Amisano, 2008. "Optimal Prediction Pools," Working Paper Series 22-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  4. Alejandro Justiniano & Bruce Preston, 2009. "Can structural small open economy models account for the influence of foreign disturbances?," Working Paper Series WP-09-19, Federal Reserve Bank of Chicago.
  5. Hugo Gerard & Kristoffer Nimark, 2008. "Combining multivariate density forecasts using predictive criteria," Economics Working Papers 1117, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
  6. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  7. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  8. Adam Cagliarini & Tim Robinson & Allen Tran, 2010. "Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness," RBA Research Discussion Papers rdp2010-01, Reserve Bank of Australia.
  9. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
  10. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
  11. Lees, Kirdan & Matheson, Troy & Smith, Christie, 2011. "Open economy forecasting with a DSGE-VAR: Head to head with the RBNZ published forecasts," International Journal of Forecasting, Elsevier, vol. 27(2), pages 512-528, April.
  12. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
  13. Gary Koop & Dimitris Korobilis, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Working Paper Series 47_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  14. Peter Tulip, 2009. "Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1217-1231, 09.
  15. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  16. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
  17. Michael Plumb & Christopher Kent & James Bishop, 2013. "Implications for the Australian Economy of Strong Growth in Asia," RBA Research Discussion Papers rdp2013-03, Reserve Bank of Australia.
  18. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics.
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Cited by:
  1. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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