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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://dems.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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  1. Consolo, Agostino & Favero, Carlo A. & Paccagnini, Alessia, 2009. "On the statistical identification of DSGE models," Journal of Econometrics, Elsevier, vol. 150(1), pages 99-115, May.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  3. 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.
  4. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
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  6. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  7. Goodness C. Aye & Mehmet Balcilar Author-Name-First Mehmet & Adel Bosch & Rangan Gupta, 2014. "Housing and the Business Cycle in South Africa," Working Papers 15-22, Eastern Mediterranean University, Department of Economics.
  8. 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, 06.
  9. 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.
  10. Sami Alpanda & Kevin Kotzé & Geoffrey Woglom, 2011. "Forecasting Performance Of An Estimated Dsge Model For The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 79(1), pages 50-67, 03.
  11. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  12. Sami Alpanda & Kevin Kotzé & Geoffrey Woglom, 2010. "The Role Of The Exchange Rate In A New Keynesian Dsge Model For The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 78(2), pages 170-191, 06.
  13. Frank Schorfheide & Keith Sill & Maxym Kryshko, 2009. "DSGE Model-Based Forecasting of Non-modelled Variables," NBER Working Papers 14872, National Bureau of Economic Research, Inc.
  14. Guangling “Dave” Liu & Rangan Gupta & Eric Schaling, 2010. "Forecasting the South African economy: a hybrid-DSGE approach," Journal of Economic Studies, Emerald Group Publishing, vol. 37(2), pages 181-195, May.
  15. 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.
  16. 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.
  17. Gupta, Rangan & Steinbach, Rudi, 2013. "A DSGE-VAR model for forecasting key South African macroeconomic variables," Economic Modelling, Elsevier, vol. 33(C), pages 19-33.
  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  19. 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.
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