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Analyzing and Forecasting Business Cycles in a Small Open Economy : A Dynamic Factor Model for Singapore

  • Hwee Kwan Chow

    (SMU)

  • Keen Meng Choy

A dynamic factor model is applied to a large panel dataset of Singapores macroeconomic variables and global economic indicators with the initial objective of analyzing business cycles in a small open economy. The empirical results suggest that four common factors are present in the quarterly time series, which can broadly be interpreted as world, regional, electronics and domestic economic cycles. The estimated factor model explains well the observed fluctuations in real economic activity and price inflation, leading us to use it in forecasting Singapores business cycles. We find that the forecasts generated by the factors are generally more accurate than the predictions of univariate models and vector autoregressions that employ leading indicators.

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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22074.

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Date of creation: Jan 2009
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Handle: RePEc:eab:macroe:22074
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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  17. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
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