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Open Economy Dsge-Var Forecasting And Policy Analysis: Head To Head With The Rbnz Published Forecasts

  • Kirdan Lees

    ()

  • Troy Matheson
  • Christie Smith

We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts froma DSGE-VAR and a "vanilla" DSGE model are competitive with, and in some dimensions superrior 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 certainty 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 Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-05.

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Length: 39 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-05
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  1. James J. Heckman, 2000. "Causal Parameters And Policy Analysis In Economics: A Twentieth Century Retrospective," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 45-97, February.
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  13. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand.
  14. Adolfson, Malin & Lindé, Jesper & Villani, Mattias, 2005. "Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model," Working Paper Series 190, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
  15. Martin Fukac & Adrian Pagan, 2006. "Issues In Adopting Dsge Models For Use In The Policy Process," CAMA Working Papers 2006-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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