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

20 Pages Posted: 4 Dec 2013

See all articles by Rangan Gupta

Rangan Gupta

University of Pretoria - Department of Economics

Patrick Kanda

affiliation not provided to SSRN

Mampho Modise

University of Pretoria - Department of Economics

Alessia Paccagnini

University College Dublin (UCD) - Michael Smurfit Graduate School of Business; Australian National University (ANU) - Crawford School of Public Policy

Date Written: December 3, 2013

Abstract

Inflation forecasts are a key ingredient for monetary policy-making -- 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 AR(1).

Keywords: DSGE model, inflation, core variables, non-core variables

JEL Classification: C11, C32, C53, E27, E47

Suggested Citation

Gupta, Rangan and Kanda, Patrick and Modise, Mampho and Paccagnini, Alessia, DSGE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa (December 3, 2013). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 259, Available at SSRN: https://ssrn.com/abstract=2362821 or http://dx.doi.org/10.2139/ssrn.2362821

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Patrick Kanda

affiliation not provided to SSRN

Mampho Modise

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Alessia Paccagnini (Contact Author)

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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