48 Pages Posted: 1 Jun 2005
Date Written: May 2005
The accession of ten countries into the European Union makes the forecasting of their key macroeconomic indicators an exercise of some importance. Because of the transition period, only short spans of reliable time series are available, suggesting the adoption of simple time series models as forecasting tools. However, despite this constraint on the span of data, a large number of macroeconomic variables (for a given time span) are available, making the class of dynamic factor models a reasonable alternative forecasting tool. The relative performance of these two forecasting approaches is compared by using data for five new Member States. The role of Euro-area information for forecasting and the usefulness of robustifying techniques such as intercept corrections are also evaluated. We find that factor models work well in general, although with marked differences across countries. Robustifying techniques are useful in a few cases, while Euro-area information is virtually irrelevant.
Keywords: Factor models, forecasts, time series models, new Member States
JEL Classification: C53, C32, E37
Suggested Citation: Suggested Citation
Banerjee, Anindya and Marcellino, Massimiliano Giuseppe and Masten, Igor, Forecasting Macroeconomic Variables for the New Member States of the European Union (May 2005). ECB Working Paper No. 482. Available at SSRN: https://ssrn.com/abstract=711161