Forecasting the South African Economy: A DSGE-VAR Approach

CentER Discussion Paper No. 2008-32

23 Pages Posted: 25 Mar 2008

See all articles by Guangling Liu

Guangling Liu

University of Johannesburg - Department of Economics

Rangan Gupta

University of Pretoria - Department of Economics

Eric Schaling

Rand Afrikaans University - Department of Economics; Bank of England

Date Written: March 2008

Abstract

This paper develops an estimable hybrid model that combines the theoretical rigor of a micro-founded DSGE model with the flexibility of an atheoretical VAR model. The model is estimated via maximum likelihood technique based on quarterly data on real Gross National Product (GNP), consumption, investment and hours worked, for the South African economy, 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 hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1-2005:4. The results indicate that, in general, the estimated hybrid DSGE model outperforms the Classical VAR, but not the Bayesian VARs in terms of out-of-sample forecasting performances.

Keywords: DSGE model, VAR and BVAR model, forecast accuracy, DSGE forecasts, VAR forecasts, BVAR forecasts

JEL Classification: E17, E27, E32, E37, E47

Suggested Citation

Liu, Guangling and Gupta, Rangan and Schaling, Eric, Forecasting the South African Economy: A DSGE-VAR Approach (March 2008). CentER Discussion Paper No. 2008-32, Available at SSRN: https://ssrn.com/abstract=1112986 or http://dx.doi.org/10.2139/ssrn.1112986

Guangling Liu

University of Johannesburg - Department of Economics ( email )

P.O. Box 524
Auckland Park 2006, Johannesburg
South Africa

Rangan Gupta (Contact Author)

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Eric Schaling

Rand Afrikaans University - Department of Economics ( email )

P.O.Box 524
2006 Auckland Park
South Africa
+27 11 489 2927/7068 (Phone)
+27 11 489 3039 (Fax)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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