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Forecasting with Factors: The Accuracy of Timeliness

  • Christian Gillitzer

    (Reserve Bank of Australia)

  • Jonathan Kearns

    (Reserve Bank of Australia)

This paper demonstrates that factor-based forecasts for key Australian macroeconomic series can outperform standard time-series benchmarks. In practice, however, the advantages of using large panels of data to construct the factors typically comes at the cost of using less timely series, thereby delaying when the forecasts can be made. To produce more timely forecasts it is possible to use a narrower data panel, though this will possibly result in less accurate factor estimates and so less accurate forecasts. We demonstrate this trade-off between accuracy and timeliness with out-of-sample forecasts. With the exception of only consumer price inflation, the forecasts do not become less accurate as they utilise less information by excluding less timely series. So while factor forecasts have large data requirements, we show that these should not prevent their practical use when timely forecasts are needed.

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File URL: http://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-03.pdf
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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2007-03.

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Date of creation: Apr 2007
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Handle: RePEc:rba:rbardp:rdp2007-03
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  1. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  2. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," NBER Working Papers 11285, National Bureau of Economic Research, Inc.
  3. Angelini, Elena & Henry, Jérôme & Mestre, Ricardo, 2001. "Diffusion index-based inflation forecasts for the euro area," Working Paper Series 0061, European Central Bank.
  4. Forni M. & Hallin M., 2003. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Computing in Economics and Finance 2003 143, Society for Computational Economics.
  5. Banerjee, Anindya & Marcellino, Massimiliano & Masten, Igor, 2005. "Forecasting macroeconomic variables for the new member states of the European Union," Working Paper Series 0482, European Central Bank.
  6. Martin Schneider & Martin Spitzer, 2004. "Forecasting Austrian GDP using the generalized dynamic factor model," Working Papers 89, Oesterreichische Nationalbank (Austrian Central Bank).
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