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A large factor model for forecasting macroeconomic variables in South Africa

  • Gupta, Rangan
  • Kabundi, Alain

This paper uses large Factor Models (FMs), which accommodate a large cross-section of macroeconomic time series for forecasting the per capita growth rate, inflation, and the nominal short-term interest rate for the South African economy. The FMs used in this study contain 267 quarterly series observed over the period 1980Q1-2006Q4. The results, based on the RMSEs of one- to four-quarter-ahead out-of-sample forecasts from 2001Q1 to 2006Q4, indicate that the FMs tend to 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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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 27 (2011)
Issue (Month): 4 (October)
Pages: 1076-1088

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Handle: RePEc:eee:intfor:v:27:y:2011:i:4:p:1076-1088
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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