Forecasting economic activity for Estonia: The application of dynamic principal component analyses

Christian Henning Schulz ()

No 2008-02, Bank of Estonia Working Papers from Bank of Estonia

Abstract: 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 naive benchmark in both in-sample and out-of-sample forecast comparisons

Keywords: Estonia; forecasting; turning points; dynamic factor models; dynamic principal components; forecast performance (search for similar items in EconPapers)
JEL-codes: C32 C33 C53 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2008-10-30, Revised 2008-10-30
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