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

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Patrick T. kanda

    ()

    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    ()

    (Department of Economics, University of Pretoria)

  • Alessia Paccagnini

    ()

    (Dipartimento di Economia, Metodi Quantitativi e Strategie d'Impresa (DEMS), Facoltà di Economia, Università degli Studi di Milano-Bicocca)

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 the AR(1).

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201374.

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Length: 19 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:pre:wpaper:201374
Contact details of provider: Postal: PRETORIA, 0002
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Web page: http://www.up.ac.za/economics
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