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Nowcasting domestic liquidity in the Philippines using machine learning algorithms

Author

Listed:
  • Juan Rufino M. Reyes

    (Bangko Sentral ng Pilipinas)

Abstract

This study utilizes a number of algorithms used in machine learning to nowcast domestic liquidity growth in the Philippines. It employs regularization (i.e., Ridge Regression, Least Absolute Shrinkage and Selection Operator (LASSO), Elastic Net (ENET)) and tree-based (i.e., Random Forest, Gradient Boosted Trees) methods in order to support the BSP’s current suite of macroeconomic models used to forecast and analyze liquidity. Hence, this study evaluates the accuracy of time series models (e.g., Autoregressive, Dynamic Factor), regularization, and tree-based methods through an expanding window. The results indicate that Ridge Regression, LASSO, ENET, Random Forest, and Gradient Boosted Trees provide better estimates than the traditional time series models, with month-ahead nowcasts yielding lower Root Mean Square Error (RMSE) and Mean Absolute Error (MAE). Furthermore, regularization and tree-based methods facilitate the identification of macroeconomic indicators that are significant to specify parsimonious nowcasting models.Â

Suggested Citation

  • Juan Rufino M. Reyes, 2022. "Nowcasting domestic liquidity in the Philippines using machine learning algorithms," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 59(2), pages 1-40, December.
    • Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:1-40
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    File URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1027/952
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    More about this item

    Keywords

    nowcasting; domestic liquidity; machine learning; ridge regression; LASSO; elastic net; random forest; gradient boosted trees;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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