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A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa

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Author Info
Rangan Gupta () (Department of Economics, University of Pretoria)
Alain Kabundi () (Department of Economics and Econometrics, University of Johannesburg)

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Abstract

This 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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Publisher Info
Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200815.

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Length: 21 pages
Date of creation: Jun 2008
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Handle: RePEc:pre:wpaper:200815

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Related research
Keywords: Dynamic Factor Model VAR BVAR NKDSGE Model Forecast Accuracy

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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References listed on IDEAS
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Cited by:
(explanations, 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.)

  1. Sonali Das & Rangan Gupta & Alain Kabundi, 2008. "Is a DFM Well-Suited in Forecasting Regional House Price Inflation?," Working Papers 200814, University of Pretoria, Department of Economics. [Downloadable!]
  2. Sonali Das & Rangan Gupta & Alain Kabundi, 2008. "Could We Have Predicted The Recent Downturn In The South African Housing Market?," Working Papers 200831, University of Pretoria, Department of Economics. [Downloadable!]
  3. Rangan Gupta & Alain Kabundi, 2008. "Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs," Working Papers 200816, University of Pretoria, Department of Economics. [Downloadable!]
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This page was last updated on 2008-11-12.

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