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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)

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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Bibliographic 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
Date of revision:
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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Cited by:
  1. Poghosyan, K., 2012. "Structural and reduced-form modeling and forecasting with application to Armenia," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5590845, Tilburg University.
  2. Rangan Gupta & Monique Reid, 2012. "Macroeconomic Surprises and Stock Returns in South Africa," Working Papers 05/2012, Stellenbosch University, Department of Economics.
  3. Rangan Gupta & Sonali Das, 2008. "Predicting Downturns in the US Housing Market: A Bayesian Approach," Working Papers, University of Pretoria, Department of Economics 200821, University of Pretoria, Department of Economics.
  4. Mirriam Chitalu Chama-Chiliba & Rangan Gupta & Nonophile Nkambule & Naomi Tlotlego, 2011. "Forecasting Key Macroeconomic Variables of the South African Economy Using Bayesian Variable Selection," Working Papers, University of Pretoria, Department of Economics 201132, University of Pretoria, Department of Economics.
  5. Rangan Gupta & Rudi Steinbach, 2010. "Forecasting Key Macroeconomic Variables of the South African Economy: A Small Open Economy New Keynesian DSGE-VAR Model," Working Papers, University of Pretoria, Department of Economics 201019, University of Pretoria, Department of Economics.

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