Factor Forecasts for the Us

42 Pages Posted: 22 Jan 2002

See all articles by Michael J. Artis

Michael J. Artis

University of Manchester - Institute for Political & Economic Governance (IPEG)

Anindya Banerjee

European University Institute - Department of Economics; University of Oxford - Department of Economics

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2002

Abstract

Time series models are often adopted for forecasting because of their simplicity and good performance. The number of parameters in these models increases quickly with the number of variables modelled, so that usually only univariate or small-scale multivariate models are considered. Yet, data are now readily available for a very large number of macroeconomic variables that are potentially useful when forecasting. Hence, in this Paper we construct a large macroeconomic data-set for the UK, with about 80 variables, model it using a dynamic factor model, and compare the resulting forecasts with those from a set of standard time series models. We find that just six factors are sufficient to explain 50 percent of the variability of all the variables in the data set. Moreover, these factors, which can be considered as the main driving forces of the economy, are related to key variables such as interest rates, monetary aggregates, prices, housing and labour market variables, and stock prices. Finally, the factor-based forecasts are shown to improve upon standard benchmarks for prices, real aggregates, and financial variables, at virtually no additional modelling or computational cost.

Keywords: Factor models, forecasts, time series models

Suggested Citation

Artis, Michael J. and Banerjee, Anindya and Marcellino, Massimiliano, Factor Forecasts for the Us (January 2002). Available at SSRN: https://ssrn.com/abstract=297910

Michael J. Artis (Contact Author)

University of Manchester - Institute for Political & Economic Governance (IPEG) ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Anindya Banerjee

European University Institute - Department of Economics ( email )

Villa San Paolo
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50133 Florence
Italy
+39 055 4685 356 (Phone)
+39 055 4685 202 (Fax)

University of Oxford - Department of Economics ( email )

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Oxford, OX1 3BJ
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Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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