The Making of National Economic Forecasts

The Making of National Economic Forecasts

Edited by Lawrence R. Klein

This important book, prepared under the direction of Nobel Laureate Lawrence R. Klein, shows how economic forecasts are made. It explains how modern developments in information technology have made it possible to forecast frequently – at least monthly but also weekly or bi-weekly – depending upon the perceived needs of potential forecast users and also on the availability of updated material.

Chapter 9: Current Quarter Model for Turkey

Süleyman Özmucur

Subjects: economics and finance, behavioural and experimental economics, econometrics, financial economics and regulation


Süleyman Özmucur INTRODUCTION 1. Forecasting of economic activity requires the use of all available information. However, key data are collected at different frequencies. This necessitates building models utilizing data at different frequencies, which was the starting point for high-frequency macroeconometric models initiated by Klein and Sojo (1989). Forecasts are useful not only for studying the short-term developments of the economy, but also for adjusting lower-frequency macroeconometric models so that they are solved from up-to-date initial conditions (Klein and Sojo, 1989; Klein and Park, 1993, 1995). We propose to form principal components of the monthly indicators whose periodic values appear at either different or similar time points of each month. Principal components analysis is based on our general point of view that a country’s (any country’s) economic growth is highly multivariate. No single measured economic activity can account for anything as complex as a modern economy. We examine many time series, and select those that seem to have a priori importance. In order to conserve degrees of freedom, we narrowed the list of explanatory variables in the relevant regression as much as possible. There have been important motivations in adopting the principal components methodology. The chapter is in six sections. The second section deals with the methodology of principal components. A brief summary of the basic features of the Turkish economy and available monthly data are presented in the third section. Section 4 is devoted to the estimation of the model. Model performance is presented in Section 5, and forecasts...

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