Abstract:
This paper develops an estimable hybrid model that combines the micro-founded
DSGE model with the °exibility of the theoretical VAR model. The model is
estimated via the maximum likelihood technique based on quarterly data on real
Gross National Product (GNP), consumption, investment and hours worked, for
the South African economy, over the period of 1970:1 to 2000:4. Based on a re-
cursive estimation using the Kalman ¯lter algorithm, the out-of-sample forecasts
from the hybrid model are then compared with the forecasts generated from the
Classical and Bayesian variants of the VAR for the period 2001:1-2005:4. The
results indicate that, in general, the estimated hybrid DSGE model outperforms
the Classical VAR, but not the Bayesian VARs in terms of out-of-sample fore-
casting performances.
