Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore

Hwee Kwan Chow and Keen Meng Choy ()

No 802, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: We apply multivariate statistical methods to a large dataset of Singapore’s macroeconomic variables and global economic indicators with the objective of forecasting business cycles in a small open economy. The empirical results suggest that three common factors are present in the time series at the quarterly frequency, which can be interpreted as world, regional and domestic economic cycles. This leads us to estimate a factor-augmented vector autoregressive (FAVAR) model for the purpose of optimally forecasting real economic activity in Singapore. By taking explicit account of the common factor dynamics, we find that iterative forecasts generated by this model are significantly more accurate than direct multi-step predictions based on the identified factors as well as forecasts from univariate and vector autoregressions.

Keywords: business cycles; principal components; dynamic factor model; factor-augmented VAR; forecasting; Singapore (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008-02
New Economics Papers: this item is included in nep-for, nep-mac, nep-opm and nep-sea
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:nan:wpaper:0802

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