Abstract:
This paper develops a Bayesian Vector Error Correction Model (BVECM) for
forecasting inventory investment in South Africa. The model is estimated using
quarterly data on actual sales, production, unfilled orders, price levels and interest rates,
for the period of 1978 to 2000. The out-of-sample-forecast accuracy obtained from the
BVECM, over the forecasting horizon of 2001:1 to 2003:4, is compared with those generated
from the Classical variant of the VAR and the VECM, the Bayesian VAR, and the ECM of
inventory investment developed by Smith et al. (2006) for the South African economy.
The BVECM with the most tight prior outperforms all the other models, except for a relatively
tight BVAR. This BVAR model also correctly predicts the direction of change of inventory
investment over the period of 2004:1 to 2006:3.
