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Forecasting economic activity for Estonia : The application of dynamic principal component analyses

  • Christian Schulz

    ()

In this paper, the dynamic common factors method of Forni et al. (2000) is applied to a large panel of economic time series on the Estonian economy. In order to improve forecasting of economic activity in Estonia, we derive a leading indicator composed of the common components of twelve series, which were identified as leading. The resulting indicator performs better than two other indicators, which are based on a small-scale state-space model used by Stock and Watson (1991) and a large-scale static principal components model used by Stock and Watson (2002), respectively. It also clearly outperforms the naive benchmark in both in-sample and out-of-sample forecast comparisons

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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2008-02.

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Date of creation: 30 Oct 2008
Date of revision: 30 Oct 2008
Handle: RePEc:eea:boewps:wp2008-2
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