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Open economy forecasting with a DSGE-VAR: Head to head with the RBNZ published forecasts

  • Lees, Kirdan
  • Matheson, Troy
  • Smith, Christie

We construct a DSGE-VAR model for competing head to head with the long history of published forecasts of the Reserve Bank of New Zealand. We also construct a Bayesian VAR model with a Minnesota prior for forecast comparison. The DSGE-VAR model combines a structural DSGE model with a statistical VAR model based on the in-sample fit over the majority of New Zealand’s inflation-targeting period. We evaluate the real-time out-of-sample forecasting performance of the DSGE-VAR model, and show that the forecasts from the DSGE-VAR are competitive with the Reserve Bank of New Zealand’s published, judgmentally-adjusted forecasts. The Bayesian VAR model with a Minnesota prior also provides a competitive forecasting performance, and generally, with a few exceptions, out-performs both the DSGE-VAR and the Reserve Bank’s own forecasts.

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File URL: http://www.sciencedirect.com/science/article/pii/S0169207010000142
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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 27 (2011)
Issue (Month): 2 ()
Pages: 512-528

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Handle: RePEc:eee:intfor:v:27:y:2011:i:2:p:512-528
DOI: 10.1016/j.ijforecast.2010.01.008
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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  1. Jordi Galí & Tommaso Monacelli, 2003. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Working Papers 11, Barcelona Graduate School of Economics.
  2. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," FRB Atlanta Working Paper 2002-14, Federal Reserve Bank of Atlanta.
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  8. Martin Fukac & Adrian Pagan, 2006. "Issues in Adopting DSGE Models for Use in the Policy Process," Working Papers 2006/6, Czech National Bank, Research Department.
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  13. Olivier Basdevant & Nils Björksten & Özer Karagedikli, 2004. "Estimating a time varying neutral real interest rate for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/01, Reserve Bank of New Zealand.
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  15. 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.
  16. 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.
  17. Marco del Negro & Frank Schorfheide, 2008. "Inflation Dynamics in a Small Open Economy Model Under Inflation Targeting: Some Evidence From Chile," Working Papers Central Bank of Chile 486, Central Bank of Chile.
  18. 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.
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