BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 12/2015:
An adaptive approach to forecasting three key macroeconomic variables for transitional China
Linlin Niu ()
, Xiu Xu ()
and Ying Chen ()
Abstract: We propose the use of a local autoregressive (LAR) model
for adaptive estimation and forecasting of three of China’s key
macroeconomic variables: GDP growth, inflation and the 7-day interbank
lending rate. The approach takes into account possible structural changes
in the data-generating process to select a local homogeneous interval for
model estimation, and is particularly well-suited to a transition economy
experiencing ongoing shifts in policy and structural adjustment. Our
results indicate that the proposed method outperforms alternative models
and forecast methods, especially for forecast horizons of 3 to 12 months.
Our 1-quarter ahead adaptive forecasts even match the performance of the
well-known CMRC Langrun survey forecast. The selected homogeneous intervals
indicate gradual changes in growth of industrial production driven by
constant evolution of the real economy in China, as well as abrupt changes
in interestrate and inflation dynamics that capture monetary policy
shifts.
Keywords: Chinese economy; local parametric models; forecasting; (follow links to similar papers)
JEL-Codes: E43; E47; (follow links to similar papers)
47 pages, April 10, 2015
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