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Analyzing and forecasting business cycles in a small open economy: A dynamic factor model for Singapore

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  • Hwee Kwan Chow

    ()

  • Keen Meng Choy

    ()

Abstract

A dynamic factor model is applied to a large panel dataset of Singapore’s macroeconomic variables and global economic indicators with the initial objective of analysing business cycles in a small open economy. The empirical results suggest that four common factors – which can broadly be interpreted as world, regional, electronics and domestic economic cycles – capture a large proportion of the co-variation in the quarterly time series. The estimated factor model also explains well the observed fluctuations in real economic activity and price inflation, leading us to use it in forecasting Singapore’s business cycles. We find that the forecasts generated by the factors are generally more accurate than the predictions of univariate models and vector autoregressions that employ leading indicators.

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File URL: http://dx.doi.org/10.1787/jbcma-v2009-art3-en
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Bibliographic Info

Article provided by OECD Publishing,CIRET in its journal OECD Journal: Journal of Business Cycle Measurement and Analysis.

Volume (Year): 2009 (2009)
Issue (Month): 1 ()
Pages: 19-41

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Handle: RePEc:oec:stdkab:5ksb9df5nqbs

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Keywords: Business Cycle; Dynamic Factor Model; Forecasting; Singapore;

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Cited by:
  1. Mendoza, Liu & Morales, Daniel, 2013. "Construyendo un índice coincidente de recesión: Una aplicación para la economía peruana," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 81-100.
  2. Mapa, Dennis S. & Simbulan, Maria Christina, 2014. "Analyzing and Forecasting Movements of the Philippine Economy using the Dynamic Factor Models (DFM)," MPRA Paper 54478, University Library of Munich, Germany.
  3. Mendoza, Liu & Morales, Daniel, 2012. "Constructing a real-time coincident recession index: an application to the Peruvian economy," Working Papers 2012-020, Banco Central de Reserva del Perú.

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