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An Empirical BVAR-DSGE Model of the Australian Economy

  • Sean Langcake

    (Reserve Bank of Australia)

  • Tim Robinson

    (Reserve Bank of Australia)

In this paper, we develop a multi-sector dynamic stochastic general equilibrium (DSGE) model with a simple commodity sector and assess whether forecasts from this model can be improved by using it as a prior for an empirical Bayesian vector autoregression (BVAR). We treat the world economy as being observed and exogenous to the small economy, rather than unobserved, as has been done in some previous studies, such as Hodge, Robinson and Stuart (2008) and Lees, Matheson and Smith (2011). We find that the forecasts from a BVAR that uses this DSGE model as a prior are generally more accurate than those from the DSGE model alone. Nevertheless, these forecasts do not outperform a small open economy VAR estimated using other standard priors or simple univariate benchmarks.

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File URL: http://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-07.pdf
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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-07.

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Date of creation: Jun 2013
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Handle: RePEc:rba:rbardp:rdp2013-07
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  1. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
  2. Alejandro Justiniano & Bruce Preston, 2009. "Can structural small open economy models account for the influence of foreign disturbances?," Working Paper Series WP-09-19, Federal Reserve Bank of Chicago.
  3. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
  4. 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.
  5. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  6. Peter Tulip, 2009. "Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1217-1231, 09.
  7. Geweke, John & Amisano, Gianni, 2011. "Optimal prediction pools," Journal of Econometrics, Elsevier, vol. 164(1), pages 130-141, September.
  8. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
  9. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics.
  10. Koop, Gary & Korobilis, Dimitris, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," MPRA Paper 20125, University Library of Munich, Germany.
  11. Hugo Gerard & Kristoffer Nimark, 2008. "Combining Multivariate Density Forecasts Using Predictive Criteria," RBA Research Discussion Papers rdp2008-02, Reserve Bank of Australia.
  12. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  13. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers 2008-15, Department of Economics, Williams College.
  14. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  15. Michael Plumb & Christopher Kent & James Bishop, 2013. "Implications for the Australian Economy of Strong Growth in Asia," RBA Research Discussion Papers rdp2013-03, Reserve Bank of Australia.
  16. Lees, Kirdan & Matheson, Troy & Smith, Christie, 2011. "Open economy forecasting with a DSGE-VAR: Head to head with the RBNZ published forecasts," International Journal of Forecasting, Elsevier, vol. 27(2), pages 512-528, April.
  17. Cagliarini, Adam & Robinson, Tim & Tran, Allen, 2011. "Reconciling microeconomic and macroeconomic estimates of price stickiness," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 102-120, March.
  18. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
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