Forecasting the South African economy with VARs and VECMs

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Authors

Gupta, Rangan

Journal Title

Journal ISSN

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Publisher

Blackwell

Abstract

The paper develops a Bayesian Vector Error Correction Model (BVECM) of the South African economy for the period 1970:1-2000:4 and forecasts GDP, consumption, investment, short and long term interest rates, and the CPI. We find that a tight prior produces relatively more accurate forecasts than a loose one. The out-of-sample-forecast accuracy resulting from the BVECM is compared with those generated from the Classical variant of the VAR and VECM and the Bayesian VAR. The BVECM is found to produce the most accurate out of sample forecasts. It also correctly predicts the direction of change in the chosen macroeconomic indicators.

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Keywords

South African economy, Bayesian vector error correction model (BVECM), Economic forecasting, Vector autoregressive (VAR) model, Vector error correction model (VECM)

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Citation

Gupta, R 2006, 'Forecasting the South African economy with VARs and VECMs', South African Journal of Economics, vol. 74, pp. 611-628. [http://www.blackwellpublishing.com/journal.asp?ref=0038-2280&site=1]