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Forecasting macroeconomic variables in a small open economy: a comparison between small- and large-scale models

Author

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  • Rangan Gupta

    (Department of Economics, University of Pretoria, South Africa)

  • Alain Kabundi

    (Department of Economics and Econometrics, University of Johannesburg, South Africa)

Abstract
This paper compares the forecasting ability of five alternative types of models in predicting four key macroeconomic variables, namely, per capita growth rate, the CPI inflation, the money market rate, and the growth rate of the nominal effective exchange rate for the South African economy. Unlike the theoretical small open economy new Keynesian dynamic stochastic general equilibrium, the unrestricted VAR, and the small-scale Bayesian vector autoregressive models, which are estimated based on four variables, dynamic factor models and the large-scale BVAR models use information from a data-rich environment containing 266 macroeconomic time series observed over the period 1983:01 to 2002:04. The results, based on root mean square errors, for one- to eight-quarter-ahead out-of-sample forecasts over the horizon of 2003:01 to 2006:04, show that, except for the growth rate of the of nominal effective exchange rate, large-scale BVARs outperform the other four types of models consistently and, generally, significantly. Copyright © 2010 John Wiley & Sons, Ltd.

Suggested Citation

  • Rangan Gupta & Alain Kabundi, 2010. "Forecasting macroeconomic variables in a small open economy: a comparison between small- and large-scale models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(1-2), pages 168-185.
    • Handle: RePEc:jof:jforec:v:29:y:2010:i:1-2:p:168-185
    DOI: 10.1002/for.1143
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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