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Forecasting South African macroeconomic variables with a Markov-switching small open-economy dynamic stochastic general equilibrium model

Author

Listed:
  • Mehmet Balcilar

    (Eastern Mediterranean University
    IPAG Business School
    University of Pretoria)

  • Rangan Gupta

    (IPAG Business School
    University of Pretoria)

  • Kevin Kotzé

    (University of Cape Town, Middle Campus)

Abstract

This paper seeks to identify evidence of regime-switching behaviour in the monetary policy response function and the variance of the shocks. It makes use of various specifications of a small open-economy Markov-switching dynamic stochastic general equilibrium model that is applied to South African data from 1989 to 2014. While the in-sample statistics suggest that some of the regime-switching models may provide superior results, the out-of-sample statistics suggest that the inclusion of various forms of regime-switching does not significantly improve upon the forecasting performance of the model. The results also suggest that the central bank response function has been consistently applied over the sample period.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Kevin Kotzé, 2017. "Forecasting South African macroeconomic variables with a Markov-switching small open-economy dynamic stochastic general equilibrium model," Empirical Economics, Springer, vol. 53(1), pages 117-135, August.
    • Handle: RePEc:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1157-6
    DOI: 10.1007/s00181-016-1157-6
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    Cited by:

    1. Byron Botha & Rulof Burger & Kevin Kotzé & Neil Rankin & Daan Steenkamp, 2023. "Big data forecasting of South African inflation," Empirical Economics, Springer, vol. 65(1), pages 149-188, July.
    2. Francis Leni Anguyo & Rangan Gupta & Kevin Kotzé, 2017. "Monetary Policy, Financial Frictions and Structural Changes: A Markov-Switching DSGE Approach," Working Papers 201748, University of Pretoria, Department of Economics.
    3. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta, 2020. "The Effectiveness Of Monetary Policy In South Africa Under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model," Journal of Developing Areas, Tennessee State University, College of Business, vol. 54(4), pages 55-73, October-D.
    4. Rangan Gupta & Hylton Hollander & Rudi Steinbach, 2020. "Forecasting output growth using a DSGE-based decomposition of the South African yield curve," Empirical Economics, Springer, vol. 58(1), pages 351-378, January.

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    More about this item

    Keywords

    Monetary policy; Inflation targeting; Markov-switching; Dynamic stochastic general equilibrium model; Bayesian estimation; Small open-economy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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