Analyzing and Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore

• Main Authors: CHOW, Hwee Kwan, CHOY, Keen Meng
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Business cycle; Dynamic factor model; Forecasting; Singapore; Asian Studies; Finance; Growth and Development; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1222; https://ink.library.smu.edu.sg/context/soe_research/article/2221/viewcontent/dynamicfactor.pdf
• Institution: Singapore Management University

A dynamic factor model is applied to a large panel dataset of Singapore’s macroeconomic variables and global economic indicators with the initial objective of analyzing business cycles in a small open economy. The empirical results suggest that four common factors are present in the quarterly time series, which can broadly be interpreted as world, regional, electronics and domestic economic cycles. The estimated factor model explains well the observed fluctuations in real economic activity and price inflation, leading us to use it in forecasting Singapore’s business cycles. We find that the forecasts generated by the factors are generally more accurate than the predictions of univariate models and vector autoregressions that employ leading indicators.