A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa
AbstractThis paper uses Dynamic Factor Models (DFMs), estimated under both classical and Bayesian assumptions, which accommodates a large cross-section of macroeconomic time series for forecasting per capita growth rate, inflation, and the nominal short-term interest rate for the South African economy. The DFMs used in this study contains 267 quarterly series observed over the period of 1980Q1-2006Q4. The results, based on the RMSEs of one- to four-quarters-ahead out of sample forecasts over 2001Q1 to 2006Q4, indicate that the DFMs significantly outperform alternative models such as an unrestricted VAR, Bayesian VARs (BVARs) and a typical New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) model in forecasting the three variables under consideration, hence, indicating the blessings of dimensionality.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200815.
Length: 21 pages
Date of creation: Jun 2008
Date of revision:
Dynamic Factor Model; VAR; BVAR; NKDSGE Model; Forecast Accuracy;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-AFR-2008-07-05 (Africa)
- NEP-ALL-2008-07-05 (All new papers)
- NEP-CBA-2008-07-05 (Central Banking)
- NEP-FOR-2008-07-05 (Forecasting)
- NEP-MAC-2008-07-05 (Macroeconomics)
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