DSGE Model-Based Forecasting of Modeled and Non-Modeled Ination Variables in South Africa

In ation forecasts are a key ingredient for monetary policymaking - especially in an in ation 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,e.g. such as alternative measures of in ation that might be of interest to policymakers, 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 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting in ation variables (both core and non-modeled) in comparison with forecasts reported by other models such as AR(1).