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

Author

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

Abstract

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).

Suggested Citation

  • Rangan Gupta & Patrick Kanda & Mampho Modise & Alessia Paccagnini, 2013. "DGSE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa," Working Papers 259, University of Milano-Bicocca, Department of Economics, revised Nov 2013.
  • Handle: RePEc:mib:wpaper:259
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    References listed on IDEAS

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    1. Aye, Goodness C. & Balcilar, Mehmet & Bosch, Adél & Gupta, Rangan, 2014. "Housing and the business cycle in South Africa," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 471-491.
    2. Sami Alpanda & Kevin Kotze & Geoffrey Woglom, 2010. "Should Central Banks of Small Open Economies Respond to Exchange Rate Fluctuations? The Case of South Africa," Working Papers 174, Economic Research Southern Africa.
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    4. Guangling 'Dave' Liu & Rangan Gupta & Eric Schaling, 2009. "A New-Keynesian DSGE model for forecasting the South African economy," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(5), pages 387-404.
    5. Mehmet Balcilar & Rangan Gupta & Kevin Kotze, 2013. "Forecasting South African Macroeconomic Data with a Nonlinear DSGE Model," Working Papers 201313, University of Pretoria, Department of Economics.
    6. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
    7. Amusa, Kafayat & Gupta, Rangan & Karolia, Shaakira & Simo-Kengne, Beatrice D., 2013. "The long-run impact of inflation in South Africa," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 798-812.
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    10. Guangling (dave Liu & Rangan Gupta, 2007. "A Small-Scale Dsge Model For Forecasting The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 75(2), pages 179-193, June.
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    1. repec:ipg:wpaper:2014-492 is not listed on IDEAS
    2. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    3. repec:ipg:wpaper:2014-471 is not listed on IDEAS
    4. repec:ipg:wpaper:2014-516 is not listed on IDEAS
    5. Gupta, Rangan & Kotzé, Kevin, 2017. "The role of oil prices in the forecasts of South African interest rates: A Bayesian approach," Energy Economics, Elsevier, vol. 61(C), pages 270-278.
    6. repec:ipg:wpaper:2014-461 is not listed on IDEAS
    7. repec:ipg:wpaper:2014-548 is not listed on IDEAS
    8. repec:ipg:wpaper:2014-475 is not listed on IDEAS

    More about this item

    Keywords

    DSGE model; in ation; core variables; non-core variables;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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