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How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach

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Author Info
Sandra Eickmeier (Deutsche Bundesbank, Economic Research Centre, Frankfurt am Main and University of Cologne, Germany)
Christina Ziegler (University of Leipzig and Ifo Institute for Economic Research, Munich, Germany)

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Abstract

This paper uses a meta-analysis to survey existing factor forecast applications for output and inflation and assesses what causes large factor models to perform better or more poorly at forecasting than other models. Our results suggest that factor models tend to outperform small models, whereas factor forecasts are slightly worse than pooled forecasts. Factor models deliver better predictions for US variables than for UK variables, for US output than for euro-area output and for euro-area inflation than for US inflation. The size of the dataset from which factors are extracted positively affects the relative factor forecast performance, whereas pre-selecting the variables included in the dataset did not improve factor forecasts in the past. Finally, the factor estimation technique may matter as well. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1056
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 3 ()
Pages: 237-265
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:jof:jforec:v:27:y:2008:i:3:p:237-265

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Nikolay Robinzonov & Klaus Wohlrabe, 2008. "Freedom of Choice in Macroeconomic Forecasting: An Illustration with German Industrial Production and Linear Models," Ifo Working Paper Series Ifo Working Paper No. 57, Ifo Institute for Economic Research at the University of Munich. [Downloadable!]
  2. Anindya Banerjee & Massimiliano Marcellino & Igor Masten, 2009. "Forecasting with Factor-Augmented Error Correction Models," Discussion Papers 09-06, Department of Economics, University of Birmingham. [Downloadable!]
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  3. Sandra Eickmeier & Tim Ng, 2009. "Forecasting national activity using lots of international predictors: an application to New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2009/04, Reserve Bank of New Zealand. [Downloadable!]
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This page was last updated on 2009-11-29.

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