Factor Forecasting Using International Targeted Predictors: The Case of German GDP

Abstract

This paper considers factor forecasting with national versus factor forecasting withinternational data. We forecast German GDP based on a large set of about 500 time series, consisting of German data as well as data from Euro-area and G7 countries. For factor estimation, we consider standard principal components as well as variable preselection prior to factor estimation using targeted predictors following Bai and Ng [Forecasting economic time series using targeted predictors, Journal of Econometrics 146 (2008), 304-317]. The results are as follows: Forecasting without data preselection favours the use of German data only, and no additional information content can be extracted from international data. However, when using targeted predictors for variable selection, international data generally improves the forecastability of German GDP.

Keywords: forecasting, factor models, international data, variable selection