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A Dynamic Factor Model for the Colombian Inflation

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  • Eliana González

    ()

  • . Luis F. Melo

    ()

  • Viviana Monroy

    ()

  • Brayan Rojas

    ()

Abstract

We use a dynamic factor model proposed by Stock and Watson [1998, 1999, 2002a,b] to forecast Colombian inflation. The model includes 92 monthly series observed over the period 1999:01-2008:06. The results show that for short-run horizons, factor model forecasts significantly outperformed the auto-regressive benchmark model in terms of the root mean squared forecast error statistic.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 549.

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Handle: RePEc:bdr:borrec:549

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Keywords: Dynamic factor models; static factor models; forecast accuracy. Classification JEL: C13; C33; C53.;

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  1. Troy D. Matheson, 2006. "Factor Model Forecasts for New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
  2. Marcellino, Massimiliano & Stock, James H & Watson, Mark W, 2005. "A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series," CEPR Discussion Papers 4976, C.E.P.R. Discussion Papers.
  3. Boivin, Jean & Ng, Serena, 2005. "Understanding and Comparing Factor-Based Forecasts," MPRA Paper 836, University Library of Munich, Germany.
  4. Michael ARTIS & Anindya BANERJEE & Massimiliano MARCELLINO, 2001. "Factor Forecasts for the UK," Economics Working Papers ECO2001/15, European University Institute.
  5. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
  6. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  7. Luis Fernando Melo Velandia & Héctor M. Núñez Amortegui, 2004. "Combinación de pronósticos de la inflación en presencia de cambios estructurales," BORRADORES DE ECONOMIA 002153, BANCO DE LA REPÚBLICA.
  8. Forni, Mario & Reichlin, Lucrezia, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 453-73, July.
  9. Ziegler, Christina & Eickmeier, Sandra, 2006. "How good are dynamic factor models at forecasting output and inflation? A meta-analytic approach," Discussion Paper Series 1: Economic Studies 2006,42, Deutsche Bundesbank, Research Centre.
  10. Chib, Siddhartha & Greenberg, Edward, 1996. "Markov Chain Monte Carlo Simulation Methods in Econometrics," Econometric Theory, Cambridge University Press, vol. 12(03), pages 409-431, August.
  11. Zaher, Fadi, 2007. "Evaluating factor forecasts for the UK: The role of asset prices," International Journal of Forecasting, Elsevier, vol. 23(4), pages 679-693.
  12. Otrok, Christopher & Whiteman, Charles H, 1998. "Bayesian Leading Indicators: Measuring and Predicting Economic Conditions in Iowa," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 997-1014, November.
  13. George Kapetanios & Vincent Labhard & Simon Price, 2007. "Forecast combination and the Bank of England’s suite of statistical forecasting models," Bank of England working papers 323, Bank of England.
  14. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
  15. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737, October.
  16. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  17. Gianluca Caporello & Agustín Maravall & Fernando J. Sánchez, 2001. "Program TSW Reference Manual," Banco de Espa�a Working Papers 0112, Banco de Espa�a.
  18. Marc-André Gosselin & Greg Tkacz, 2001. "Evaluating Factor Models: An Application to Forecasting Inflation in Canada," Working Papers 01-18, Bank of Canada.
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Citations

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Cited by:
  1. Eliana González, . "Bayesian Model Averaging. An Application to Forecast Inflation in Colombia," Borradores de Economia 604, Banco de la Republica de Colombia.
  2. Andrés Felipe Londoño & Jorge Andrés Tamayo & Carlos Alberto Velásquez, 2012. "Dinámica de la política monetaria e inflación objetivo en Colombia: una aproximación FAVAR," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  3. Eliana González, 2011. "Forecasting With Many Predictors. An Empirical Comparison," BORRADORES DE ECONOMIA 007996, BANCO DE LA REPÚBLICA.
  4. Eliana González, 2010. "Bayesian Model Averaging. An Application to Forecast Inflation in Colombia," BORRADORES DE ECONOMIA 007014, BANCO DE LA REPÚBLICA.
  5. Eliana González, . "Forecasting With Many Predictors. An Empirical Comparison," Borradores de Economia 643, Banco de la Republica de Colombia.
  6. Eliana González, 2010. "Bayesian Model Averaging. An Application to Forecast Inflation in Colombia," BORRADORES DE ECONOMIA 007015, BANCO DE LA REPÚBLICA.
  7. Eliana González, 2010. "Bayesian Model Averaging. An Application to Forecast Inflation in Colombia," BORRADORES DE ECONOMIA 007013, BANCO DE LA REPÚBLICA.

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