The role of country-specific trade and survey data in forecasting euro area manufacturing production. Perspective from Large Panel factor models

Laurent Maurin () and Matthieu DARRACQ PARIES ()
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Laurent Maurin: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 894, Working Paper Series from European Central Bank

Abstract: Several factor-based models are estimated to investigate the role of country-specific trade and survey data in forecasting euro area manufacturing production. Following Boivin and Ng (2006), the emphasis is put on the role of dataset selection on the empirical performance of factor models. First, spectral analysis is used to assess the information content for euro area manufacturing production of external trade and surveys data of the three largest economies as well as two medium-sized highly opened economies. Second, common factors are estimated on four datasets, following twomethodologies, Stock andWatson (2002a, 2002b) and Forni et al. (2005). Third, a rolling out of sample forecast comparison exercise is carried out on ninemodels. Compared to univariate benchmarks, our results are supportive of factor-basedmodels up to two quarters. They show that incorporating survey and external trade information improves the forecast of manufacturing production. They also confirm the findings of Marcellino, Stock and Watson (2003) that, using country information, it is possible to improve forecasts for the euro area. Interesting, the medium-sized highly opened economies provide valuable information to monitor area wide developments, beyond their weight in the aggregate. Conversely, the large countries do not add much to the monitoring of the aggregate, when considered separately. JEL Classification: E37, C3, C53.

Keywords: Factor models; Dataset; Forecasting. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-for and nep-int
Date: 2008-05
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