2/2008 Christian Schulz. Forecasting economic activity for Estonia: The application of dynamic principal components analysis
Working Papers of Eesti Pank. No 2/2008
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 naïve benchmark in both in-sample and out-of-sample forecast comparisons.
JEL Code: C32, C33, C53, E37
Key words: Estonia, forecasting, turning points, dynamic factor models, dynamic principal components, forecast performance
Author's e-mail address: Schulz.Christian [at] bcg.com
The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.
- 1. Introduction
- 2. Literature review
- 3. Empirical framework
- 4. The Estonian Data Set
- 5. Forecasting Economic Growth for Estonia
- 6. Conclusions
- Appendix 1. Data Set and Sources and Cross-correlation with Respect to the Reference Series
Forecasting Economic Activity for Estonia: The Application of Dynamic Principal Components Analysis, Working Papers of Eesti Pank No 2/2008 (PDF*)
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