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Short-term forecasting of the Japanese economy using factor models

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  • Godbout, Claudia
  • Lombardi, Marco J.

Abstract

While the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis. To do so, we construct factor models to forecast Japanese GDP and its subcomponents, using 38 data series (including daily, monthly and quarterly variables) over the period 1991 to 2010. Overall, we find that factor models perform well at tracking GDP movements and anticipating turning points. For most of the components, we report that factor models yield lower forecasting errors than a simple AR process or an indicator model based on Purchasing Managers' Indicators (PMIs). In line with previous studies, we conclude that the largest improvements in terms of forecasting accuracy are found for more volatile periods, such as the recent financial crisis. However, unlike previous studies, we do not find evident links between the volatility of the components and the relative advantage of using factor models. Finally, we show that adding the PMI index as an independent explanatory variable improves the forecasting properties of the factor models. JEL Classification: C50, C53, E37, E47

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Paper provided by European Central Bank in its series Working Paper Series with number 1428.

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Date of creation: Mar 2012
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Handle: RePEc:ecb:ecbwps:20121428

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Keywords: Factor models; forecasting; Japan; mixed frequency; Nowcasting;

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  1. Mototsugu Shintani, 2003. "Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan," Vanderbilt University Department of Economics Working Papers 0322, Vanderbilt University Department of Economics, revised Apr 2004.
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  5. James Rossiter, 2010. "Nowcasting the Global Economy," Discussion Papers 10-12, Bank of Canada.
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  9. Domenico Giannone & Lucrezia Reichlin & David H Small, 2007. "Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases," Money Macro and Finance (MMF) Research Group Conference 2006 164, Money Macro and Finance Research Group.
  10. Jakaitiene, Audrone & Dées, Stéphane, 2009. "Forecasting the world economy in the short-term," Working Paper Series 1059, European Central Bank.
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  12. Giuseppe Parigi & Roberto Golinelli, 2007. "The use of monthly indicators to forecast quarterly GDP in the short run: an application to the G7 countries," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(2), pages 77-94.
  13. Alessi, Lucia & Barigozzi, Matteo & Capasso, Marco, 2010. "Improved penalization for determining the number of factors in approximate factor models," Statistics & Probability Letters, Elsevier, vol. 80(23-24), pages 1806-1813, December.
  14. Igor Masten & Massimiliano Marcellino & Anindya Banerjeey, 2009. "Forecasting with Factor-augmented Error Correction Models," RSCAS Working Papers 2009/32, European University Institute.
  15. Antonello D'Agostino & Domenico Giannone & Paolo Surico, 2005. "(Un)Predictability and Macroeconomic Stability," Macroeconomics 0510024, EconWPA.
  16. 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.
  17. Shin-ichi Fukuda & Takashi Onodera, 2001. "A New Composite Index of Coincident Economic Indicators in Japan: How can we improve the forecast performance? ," CIRJE F-Series CIRJE-F-101, CIRJE, Faculty of Economics, University of Tokyo.
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  19. Breitung, Jörg & Eickmeier, Sandra, 2005. "Dynamic factor models," Discussion Paper Series 1: Economic Studies 2005,38, Deutsche Bundesbank, Research Centre.
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Cited by:
  1. Maxime Leboeuf & Louis Morel, 2014. "Forecasting Short-Term Real GDP Growth in the Euro Area and Japan Using Unrestricted MIDAS Regressions," Discussion Papers 14-3, Bank of Canada.
  2. Marek Rusnak, 2013. "Nowcasting Czech GDP in Real Time," Working Papers 2013/06, Czech National Bank, Research Department.

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