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Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs

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Author Info
Rangan Gupta () (Department of Economics, University of Pretoria)
Alain Kabundi () (Department of Economics and Econometrics, University of Johannesburg)

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Abstract

This paper uses two-types of large-scale models, namely the Dynamic Factor Model (DFM) and Bayesian Vector Autoregressive (BVAR) Models based on alternative hyperparameters specifying the prior, which accommodates 267 macroeconomic time series, to forecast key macroeconomic variables of a small open economy. Using South Africa as a case study and per capita growth rate, inflation rate, and the short-term nominal interest rate as our variables of interest, we estimate the two-types of models over the period 1980Q1 to 2006Q4, and forecast one- to four-quarters-ahead over the 24-quarters out-of-sample horizon of 2001Q1 to 2006Q4. The forecast performances of the two large-scale models are compared with each other, and also with an unrestricted three-variable Vector Autoregressive (VAR) and BVAR models, with identical hyperparameter values as the large-scale BVARs. The results, based on the average Root Mean Squared Errors (RMSEs), indicate that the large-scale models are better-suited for forecasting the three macroeconomic variables of our choice, and amongst the two types of large-scale models, the DFM holds the edge.

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Publisher Info
Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200816.

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Length: 15 pages
Date of creation: Jun 2008
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Handle: RePEc:pre:wpaper:200816

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Related research
Keywords: Dynamic Factor Model; BVAR; Forecast Accuracy;

Other versions of this item:

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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References listed on IDEAS
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    Other versions:
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  6. Rangan Gupta & Sonali Das, 2008. "Spatial Bayesian Methods of Forecasting House Prices in Six Metropolitan Areas of South Africa," Working Papers 200813, University of Pretoria, Department of Economics.
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  7. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2006. "Forecasting using a large number of predictors - Is Bayesian regression a valid alternative to principal components?," Working Paper Series 700, European Central Bank. [Downloadable!]
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  14. Rangan Gupta, 2007. "Bayesian Methods of Forecasting Inventory Investment in South Africa," Working Papers 200704, University of Pretoria, Department of Economics.
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  19. Forni, Mario, et al, 2001. "Coincident and Leading Indicators for the Euro Area," Economic Journal, Royal Economic Society, vol. 111(471), pages C62-85, May. [Downloadable!] (restricted)
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  21. LeSage, James P, 1990. "A Comparison of the Forecasting Ability of ECM and VAR Models," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 664-71, November. [Downloadable!] (restricted)
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  23. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2005. "A Core Inflation Indicator for the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 539-60, June.
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  26. Rangan Gupta, 2006. "FORECASTING THE SOUTH AFRICAN ECONOMY WITH VARs AND VECMs," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 611-628, December. [Downloadable!] (restricted)
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  27. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sonali Das & Rangan Gupta & Alain Kabundi, 2008. "Could We Have Predicted The Recent Downturn In The South African Housing Market?," Working Papers 200831, University of Pretoria, Department of Economics.
  2. Rangan Gupta & Alain Kabundi, 2008. "Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models," Working Papers 200830, University of Pretoria, Department of Economics.
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