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DGSE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa

  • Rangan Gupta
  •  Patrick Kanda
  • Mampho Modise
  • Alessia Paccagnini

Inflation forecasts are a key ingredient for monetary policymaking - especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, e.g. such as alternative measures of inflation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and non-modeled) in comparison with forecasts reported by other models such as AR(1).

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper259.pdf
File Function: First version, 2013
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 259.

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Length: 20
Date of creation: Nov 2013
Date of revision: Nov 2013
Handle: RePEc:mib:wpaper:259
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