Open economy forecasting with a DSGE‐VAR: Head to head with the RBNZ published forecasts

We construct a DSGE‐VAR model for competing head to head with the long history of published forecasts of the Reserve Bank of New Zealand. We also construct a Bayesian VAR model with a Minnesota prior for forecast comparison. The DSGE‐VAR model combines a structural DSGE model with a statistical VAR model based on the in‐sample fit over the majority of New Zealand’s inflation‐targeting period. We evaluate the real‐time out‐of‐sample forecasting performance of the DSGE‐VAR model, and show that the forecasts from the DSGE‐VAR are competitive with the Reserve Bank of New Zealand’s published, judgmentally‐adjusted forecasts. The Bayesian VAR model with a Minnesota prior also provides a competitive forecasting performance, and generally, with a few exceptions, out‐performs both the DSGE‐VAR and the Reserve Bank’s own forecasts.