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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. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  2. Justiniano, Alejandro & Preston, Bruce, 2010. "Can structural small open-economy models account for the influence of foreign disturbances?," Journal of International Economics, Elsevier, vol. 81(1), pages 61-74, May.
  3. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," RBA Research Discussion Papers rdp2008-05, Reserve Bank of Australia.
  4. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
  5. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. 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.
  8. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," SSE/EFI Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  9. 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.
  10. Koop, Gary & Korobilis, Dimitris, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," MPRA Paper 20125, University Library of Munich, Germany.
  11. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  12. 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.
  13. Hugo Gerard & Kristoffer Nimark, 2008. "Combining multivariate density forecasts using predictive criteria," Economics Working Papers 1117, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
  14. Geweke, John & Amisano, Gianni, 2011. "Optimal prediction pools," Journal of Econometrics, Elsevier, vol. 164(1), pages 130-141, September.
  15. 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.
  16. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
  17. 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.
  18. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
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