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Forecasting Inflation and GDP growth: Comparison of Automatic Leading Indicator (ALI) Method with Macro Econometric Structural Models (MESMs)

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Author Info

  • Duo Qin

    (Queen Mary, University of London)

  • Marie Anne Cagas

    (Asian Development Bank (ADB), and University of the Philippines)

  • Geoffrey Ducanes

    (Asian Development Bank (ADB), and University of the Philippines)

  • Nedelyn Magtibay-Ramos

    (Asian Development Bank (ADB))

  • Pilipinas Quising

    (Asian Development Bank (ADB))

Abstract

This paper compares forecast performance of the ALI method and the MESMs and seeks ways of improving the ALI method. Inflation and GDP growth form the forecast objects for comparison, using data from China, Indonesia and the Philippines. The ALI method is found to produce better forecasts than those by MESMs in general, but the method is found to involve greater uncertainty in choosing indicators, mixing data frequencies and utilizing unrestricted VARs. Two possible improvements are found helpful to reduce the uncertainty: (i) give theory priority in choosing indicators and include theory-based disequilibrium shocks in the indicator sets; and (ii) reduce the VARs by means of the general→specific model reduction procedure.

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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 554.

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Date of creation: Mar 2006
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Handle: RePEc:qmw:qmwecw:wp554

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Keywords: Dynamic factor models; Model reduction; VAR;

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  1. Cagas, Marie Anne & Ducanes, Geoffrey & Magtibay-Ramos, Nedelyn & Qin, Duo & Quising, Pilipinas, 2006. "A small macroeconometric model of the Philippine economy," Economic Modelling, Elsevier, vol. 23(1), pages 45-55, January.
  2. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2007. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Center for Economic Research (RECent) 008, University of Modena and Reggio E., Dept. of Economics.
  3. Banerjee, Anindya & Marcellino, Massimiliano & Masten, Igor, 2003. "Leading Indicators for Euro Area Inflation and GDP Growth," CEPR Discussion Papers 3893, C.E.P.R. Discussion Papers.
  4. George Kapetanios, 2002. "Factor Analysis Using Subspace Factor Models: Some Theoretical Results and an Application to UK Inflation Forecasting," Working Papers 466, Queen Mary, University of London, School of Economics and Finance.
  5. Michael P. Clements & David F. Hendry, 2002. "Modelling methodology and forecast failure," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 319-344, 06.
  6. n/a, 2002. "Credibility of the Russian Stabilisation Programme in 1995-98," NIESR Discussion Papers 149, National Institute of Economic and Social Research.
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