Forecasting Business Cycles In A Small Open Economy: A Dynamic Factor Model For Singapore

The authors apply multivariate statistical methods to a large dataset of Singapore's macroeconomic variables and global economic indicators with the objective of forecasting business cycles in a small open economy. The empirical results suggest that three common factors are present in the time series at the quarterly frequency, which can be interpreted as world, regional and domestic economic cycles. This leads one to estimate a Factor-Augmented Vector Autoregressive (FAVAR) model for the purpose of optimally forecasting real economic activity in Singapore.