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Forecasting Euro‐Area Macroeconomic Variables Using a Factor Model Approach for Backdating
Author(s) -
Brüggemann Ralf,
Zeng Jing
Publication year - 2015
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12053
Subject(s) - inflation (cosmology) , econometrics , dynamic factor , economics , factor analysis , sample (material) , series (stratigraphy) , computer science , biology , paleontology , chemistry , physics , chromatography , theoretical physics
We suggest to use a factor model based backdating procedure to construct historical Euro‐area macroeconomic time series data for the pre‐Euro period. We argue that this is a useful alternative to standard contemporaneous aggregation methods. The article investigates for a number of Euro‐area variables whether forecasts based on the factor‐backdated data are more precise than those obtained with standard area‐wide data. A recursive pseudo‐out‐of‐sample forecasting experiment using quarterly data is conducted. Our results suggest that some key variables (e.g. real GDP, inflation and long‐term interest rate) can indeed be forecasted more precisely with the factor‐backdated data.