Estimating Large-Scale Factor Models for Economic Activity in Germany: Do They Outperform Simpler Models?
Jahrbücherfür Nationalökonomie und Statistik (Journal of Economics and Statistics), Vol. 224, pp. 732-750, 2004
Posted: 16 Jun 2008
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Estimating Large-Scale Factor Models for Economic Activity In Germany: Do They Outperform Simpler Models?
Abstract
This paper discusses a large-scale factor model for the German economy. Following the recent literature, a data set of 121 time series is used via principal component analysis to determine the factors, which enter a dynamic model for German GDP. The model is compared with alternative univariate and multivariate models. These models are based on regression techniques and considerably smaller data sets. Out-of-sample forecasts show that the prediction errors of the factor model are smaller than the errors of the rival models. However, these advantages are not statistically significant, as a test for equal forecast accuracy shows. Therefore, the effciency gains of using a large data set with this kind of factor models seem to be limited.
Keywords: Factor models, Principal components, forecasting accuracy
JEL Classification: E32, C51, C43
Suggested Citation: Suggested Citation