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Estimating Large-Scale Factor Models for Economic Activity in Germany: Do They Outperform Simpler Models? / Die Schätzung von großen Faktormodellen für die deutsche Volkswirtschaft: Übertreffen sie einfachere Modelle?

  • Schumacher Christian


    (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, D-60431 Frankfurt am Main. Tel.: ++49/+69-95 66-29 39, Fax: ++49/+69-95 66-29 82, Germany)

  • Dreger Christian


    (Halle Institute for Economic Research – IWH, Kleine Märkerstraße 8, D-06108 Halle (Saale). Tel.: ++49/+3 45-77 53-8 54, Fax: ++49/+3 45-77 53-8 20, Germany)

This paper discusses a large-scale factor model for the German economy, Following the recent literature, a data set of 121 time series is used to determine the factors by principal component analysis. The factors enter a linear dynamic model for German GDP. To evaluate its empirical properties, the model is compared with alternative univariate and multivariate models. These simpler models are based on regression techniques and considerably smaller data sets. Empirical forecast tests show that the large-scale factor model almost always encompasses its rivals. Moreover, out-of-sample forecasts of the large-scale factor model have smaller prediction errors than the forecasts of the alternative models. However, these advantages are not statistically significant, as a test for equal forecast accuracy shows. Therefore, the efficiency gains of using a large data set with this kind of factor models seem to be limited.

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Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

Volume (Year): 224 (2004)
Issue (Month): 6 (December)
Pages: 731-750

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Handle: RePEc:jns:jbstat:v:224:y:2004:i:6:p:731-750
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