Time series models are often adopted for forecasting because of their simplicity and good performance. The number of parameters in these models increases quickly with the number of variables modelled, so that usually only univariate or small-scale multivariate models are considered. Yet, data are now readily available for a very large number of macroeconomic variables that are potentially useful when forecasting. Hence, in this Paper we construct a large macroeconomic data-set for the UK, with about 80 variables, model it using a dynamic factor model, and compare the resulting forecasts with those from a set of standard time series models. We find that just six factors are sufficient to explain 50% of the variability of all the variables in the data set. Moreover, these factors, which can be considered as the main driving forces of the economy, are related to key variables such as interest rates, monetary aggregates, prices, housing and labour market variables, and stock prices. Finally, the factor-based forecasts are shown to improve upon standard benchmarks for prices, real aggregates, and financial variables, at virtually no additional modelling or computational cost.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3119.
Michael Artis & Anindya Banerjee & Massimiliano Marcellino, .
"Factor forecasts for the UK,"
Working Papers
203, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
James H. Stock & Mark W. Watson, 1998.
"Diffusion Indexes,"
NBER Working Papers
6702, National Bureau of Economic Research, Inc.
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