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A New-Keynesian DSGE Model for Forecasting the South African Economy

  • Guangling (Dave) Liu

    ()

    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Eric Schaling

    ()

    (Department of Economics, University of Pretoria)

This paper develops a New-Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) Model for forecasting the growth rate of output, inflation, and the nominal short-term interest rate (91-days Treasury Bills rate) for the South African economy. The model is estimated via maximum likelihood technique for quarterly data over the period of 1970:1-2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out-of-sample forecasts from the NKDSGE model are then compared with the forecasts generated from the Classical and Bayesian variants of the Vector Autoregression (VAR) models for the period 2001:1-2006:4. The results indicate that in terms of out-of-sample forecasting the NKDSGE model outperforms both the Classical and the Bayesian VARs for inflation, but not for output growth and the nominal short-term interest rate. However, the differences in the RMSEs are not significant across the models.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200805.

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Length: 28 pages
Date of creation: Apr 2008
Handle: RePEc:pre:wpaper:200805
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Web page: http://www.up.ac.za/economics

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