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Forecasting Indian Macroeconomic Variables Using Medium-Scale VAR Models

Author

Listed:
  • Goodness C. Aye

    (Department of Economics, University of Pretoria)

  • Pami Dua

    (Department of Economics, Delhi School of Economics, University of Delhi.)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

Abstract
This paper evaluates the performance of 11 vector autoregressive models in forecasting 15 macroeconomic variables for the Indian economy over the 2007:01 to 2011:10 out-of-sample period. We consider 3 classical VARs, 4 Bayesian VARs and 4 Bayesian Factor Augmented VARs. Comparing the performance by minimum average RMSEs of the models to the benchmark random walk model, we find that in general, the 11 models outperform the random walk model. Although, there is no specific model that outperforms others at all horizons for any of the variables, the Bayesian VARs and Bayesian Factor Augmented VAR models on average outperform the classical VARs. We also provide an ex ante forecast using the selected `best' models and find that these models do not perfectly capture the turning points in each of the series pointing to the importance of conducting future research in a non-linear framework.

Suggested Citation

  • Goodness C. Aye & Pami Dua & Rangan Gupta, 2013. "Forecasting Indian Macroeconomic Variables Using Medium-Scale VAR Models," Working Papers 201342, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201342
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    Cited by:

    1. Aye, Goodness C. & Balcilar, Mehmet & Gupta, Rangan & Majumdar, Anandamayee, 2015. "Forecasting aggregate retail sales: The case of South Africa," International Journal of Production Economics, Elsevier, vol. 160(C), pages 66-79.

    More about this item

    Keywords

    VAR; Bayesian VAR; FAVAR; Forecasting; India;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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