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

Hwee Kwan Chow and Keen Meng Choy (keenchoy@gmail.com)

No 05-2009, Working Papers from Singapore Management University, School of Economics

Abstract: A dynamic factor model is applied to a large panel dataset of Singapore’s macroeconomic variables and global economic indicators with the initial objective of analyzing business cycles in a small open economy. The empirical results suggest that four common factors are present in the quarterly time series, which can broadly be interpreted as world, regional, electronics and domestic economic cycles. The estimated factor model explains well the observed fluctuations in real economic activity and price inflation, leading us to use it in forecasting Singapore’s business cycles. We find that the forecasts generated by the factors are generally more accurate than the predictions of univariate models and vector autoregressions that employ leading indicators.

Keywords: Business cycle; Dynamic factor model; Forecasting; Singapore (search for similar items in EconPapers)
JEL-codes: C32 C33 E32 E37 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-02
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Citations: View citations in EconPapers (7)

Published in SMU Economics and Statistics Working Paper Series

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Related works:
Journal Article: Analyzing and forecasting business cycles in a small open economy: A dynamic factor model for Singapore (2009)
Working Paper: Analyzing and Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore (2009)
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