SFB649DP2015 023
An Adaptive Approach to Forecasting Three Key
Macroeconomic Variables for Transitional China
Linlin Niu
Xiu Xu
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 interest rate
and inflation dynamics that capture monetary policy shifts.
Keywords:
Chinese economy, local parametric models, forecasting
JEL Classification:
E43, E47