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Forecasting Economic Cycle with a Structural Equation Model: Evidence from Thailand

Author

Listed:
  • Jeerawadee Pumjaroen

    (School of Applied Statistics, National Institute of Development Administration, Bangkok 10240, Thailand)

  • Preecha Vichitthamaros

    (School of Applied Statistics, National Institute of Development Administration, Bangkok 10240, Thailand)

  • Yuthana Sethapramote

    (School of Development Economics, National Institute of Development Administration, Bangkok 10240, Thailand.)

Abstract

The study proposes a partial least squares structural equation modeling (PLS-SEM) evaluating the relationship among composite leading indices (CLIs) to forecast the economic cycle (EC) instead of using only individual CLI. The model of quarterly data in Thailand during 2013-2018 includes five constructs representing economic sectors that have the potential to be CLIs of EC. Those are two short-term CLIs including Short-leading economic index (SLEI) and International transmission (Trade channel) (ITT). SLEI composes Narrow money, Business sentiment index (Next 3 months), and Export volume index while ITT constructs from CLI of the major export partners. The Financial cycle (FC) has the potential to be the medium-term CLI, which includes Housing price index, Household debt to GDP, and Household debt. While Monetary condition (MC) and International transmission (Monetary channel) (ITM) are the long-term CLI. MC consists of Policy interest rate and real effective exchange rate whereas ITM is represented by the global economy using CLI for OECD and non-member economies as a proxy. The evidence from the forecasting performance in the out-of-sample by PLS-SEM outperforms the alternative models for all short-term, middle-term, and long-term periods. Therefore, the study convinces to apply the PLS-SEM to forecast EC.

Suggested Citation

  • Jeerawadee Pumjaroen & Preecha Vichitthamaros & Yuthana Sethapramote, 2020. "Forecasting Economic Cycle with a Structural Equation Model: Evidence from Thailand," International Journal of Economics and Financial Issues, Econjournals, vol. 10(3), pages 47-57.
  • Handle: RePEc:eco:journ1:2020-03-7
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    References listed on IDEAS

    as
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    Cited by:

    1. Monika Gupta & Shubhi Bansal, 2020. "Covid-19 Disruption of Middle-Class Monthly Household Income and Budget," International Journal of Economics and Financial Issues, Econjournals, vol. 10(6), pages 10-17.

    More about this item

    Keywords

    PLS-SEM; leading indicator; economic cycle; forecasting;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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