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, for example
alternative measures of inflation that might be of interest to policy-makers,
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 to 2011Q4. The hybrid DSGE performs extremely well
in forecasting inflation variables (both core and nonmodelled) in comparison
with forecasts reported by other models such as AR(1). In addition,
based on ex-ante forecasts over the period 2012Q1–2013Q4, we find that
the DSGE model performs better than the AR(1) counterpart in forecasting
actual GDP deflator inflation.