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How successful are dynamic factor models at forecasting output and inflation? A meta‐analytic approach
Author(s) -
Eickmeier Sandra,
Ziegler Christina
Publication year - 2008
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.1056
Subject(s) - dynamic factor , inflation (cosmology) , econometrics , factor analysis , factor (programming language) , economics , estimation , computer science , physics , management , theoretical physics , programming language
This paper uses a meta‐analysis to survey existing factor forecast applications for output and inflation and assesses what causes large factor models to perform better or more poorly at forecasting than other models. Our results suggest that factor models tend to outperform small models, whereas factor forecasts are slightly worse than pooled forecasts. Factor models deliver better predictions for US variables than for UK variables, for US output than for euro‐area output and for euro‐area inflation than for US inflation. The size of the dataset from which factors are extracted positively affects the relative factor forecast performance, whereas pre‐selecting the variables included in the dataset did not improve factor forecasts in the past. Finally, the factor estimation technique may matter as well. Copyright © 2008 John Wiley & Sons, Ltd.