Forecasting the South African Economy: A DSGE-VAR Approach

CentER Working Paper No. 2008-32

23 Pages Posted: 20 Sep 2010

See all articles by Rangan Gupta

Rangan Gupta

University of Pretoria - Department of Economics

Eric Schaling

Rand Afrikaans University - Department of Economics; Bank of England

Dave Liu

Stellenbosch University

Date Written: March 19, 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

Gupta, Rangan and Schaling, Eric and Liu, Guangling, Forecasting the South African Economy: A DSGE-VAR Approach (March 19, 2008). CentER Working Paper No. 2008-32. Available at SSRN: https://ssrn.com/abstract=1679389 or http://dx.doi.org/10.2139/ssrn.1679389

Rangan Gupta

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

Guangling Liu (Contact Author)

Stellenbosch University ( email )

Stellenbosch, Western Cape 7602
South Africa
27 21 808 2238 (Phone)
27 21 8084637 (Fax)

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