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.
