A large factor model for forecasting macroeconomic variables in South Africa |
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Authors: | Rangan Gupta Alain Kabundi |
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Affiliation: | a University of Pretoria, Department of Economics, Pretoria, 0002, South Africab University of Johannesburg, Department of Economics, Johannesburg, 2006, South Africa |
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Abstract: | This paper uses large Factor Models (FMs), which accommodate a large cross-section of macroeconomic time series for forecasting the per capita growth rate, inflation, and the nominal short-term interest rate for the South African economy. The FMs used in this study contain 267 quarterly series observed over the period 1980Q1-2006Q4. The results, based on the RMSEs of one- to four-quarter-ahead out-of-sample forecasts from 2001Q1 to 2006Q4, indicate that the FMs tend to outperform alternative models such as an unrestricted VAR, Bayesian VARs (BVARs) and a typical New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) model in forecasting the three variables under consideration, hence indicating the blessings of dimensionality. |
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Keywords: | Large factor model VAR BVAR NKDSGE model Forecast accuracy |
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