Evaluating Forecasts from Factor Models for Canadian GDP Growth and Core Inflation

This paper evaluates the performance of static and dynamic factor models for forecasting Canadian real output growth and core inflation on a quarterly basis. We extract the common component from a large number of macroeconomic indicators, and use the estimates to compute out-of-sample forecasts under a recursive and a rolling scheme with different window sizes. Forecasts from factor models are compared with those from AR(p) models as well as IS- and Phillips-curve models. We find that factor models can improve the forecast accuracy relative to standard benchmark models, for horizons of up to 8 quarters. Forecasts from our proposed factor models are also less prone to committing large errors, in particular when the horizon increases. We further show that the choice of the sampling-scheme has a large influence on the overall forecast accuracy, with smallest rolling-window samples generating superior results to larger samples, implying that using "limited-memory" estimators contribute to improve the quality of the forecasts.Econometric and statistical methods

The Impact of Emerging Asia on Commodity Prices

Over the past 5 years, real energy and non-energy commodity prices have trended sharply higher. These relative price movements have had important implications for inflation and economic activity in both Canada and the rest of the world. China has accounted for the bulk of incremental demand for oil and many base metals over this period. As rapid economic growth in China has raised the level of world demand, this has put upward pressure on commodity prices. The effect has been amplified by rising resource intensities in China's production in recent years. This paper discusses the factors driving emerging Asia's demand for commodities and assesses the impact of emerging Asia on the real prices of oil and base metals in the Bank of Canada Commodity Price Index (BCPI). Two separate single-equation models are estimated for oil and the base metals price index. We employ a structural break approach for oil prices, while metals prices are modelled with an error correction model (ECM). In both cases, we find strong evidence that oil and metals prices have historically moved with the business cycle in the developed world, but that this relationship has broken down since mid-1997. Thereafter, industrial activity in emerging Asia appears to have become a more dominant driver of oil price movements. While metal price fluctuations have also become increasingly aligned with levels of industrial activity in emerging Asia, rising intensities of metal production may have been a more important factor behind the acceleration in prices in recent years.Business fluctuations and cycles; International topics

Offshoring and Its Effects on the Labour Market and Productivity: A Survey of Recent Literature

Offshoring has become an increasingly prominent aspect of the globalization process. Evidence over the past two decades suggests that offshoring has not exerted a noticeable impact on overall employment and earnings growth in advanced economies, but it has likely contributed to shifting the demand for labour towards higher-skilled jobs. There appear to be some positive effects of offshoring on productivity, but such effects differ by country.

Modeling Health Status Identification in a Gas Turbine System: Three-Class Classification Approaches

Rapid developments in sensor technology, data processing tools and data storage capability have helped fuel an increased appetite for equipment health monitoring in mechanical systems. As a result, the number of sensors and amount of data collected for health monitoring has grown tremendously. It is hoped that by collecting large quantities of operational data, predictive tools can be developed that will provide operational, maintenance and safety benefits. Data mining and machine learning techniques are important tools in addressing the ensuing challenge of extracting useful results from the data collected. In this work, the sensor data from a gas turbine system was analyzed with the objective of failure modeling and prediction. Previous efforts had used a two-class approach for this problem, to distinguish healthy and failed states of the system. In this work, a third class labelled as deteriorated data is added prior to each failure event to explore the ability of machine learning models to provide early warning of upcoming incidents. Several maintenance incidents were recorded by the sensor system in two separate vehicles. Three approaches to selecting training data were used. The first followed a traditional method of randomly selecting data points from all data according to a desired percentage of failed data to include in training, target ratios between failed and healthy data in each data set, as well as target ratios between training and testing data. The second data selection strategy was to consider data related to failure incidents as a whole and select certain incidents to include in training, and the remaining ones to be unseen in testing. The third approach was cross-validation which is typically used as a technique to evaluate how a classifier will perform on unseen data while still using the entirety of the data to train the final classifier. In addition to investigating training and data selection strategies, the effect of hyperparameter optimization was explored as well as the effect of varying the time period of the deteriorated class. Using the gas turbine data, which included 7 failure incidents and 76 predictor variables, a variety of classifier models of the system were developed in a three-class problem to differentiate healthy, deteriorated and failed system states. The classifier methods included support vector machines, Gaussian Naïve Bayes, random forest, adaboost, multilayer perceptron, k-nearest neighbor, and XG boost. Ensemble models were also created to leverage all the individual classifier models that were developed. This paper will describe the comprehensive results that were obtained using the various approaches and combinations, highlighting the respective benefits and limitations

Are Commodity Prices Useful Leading Indicators of Inflation?

Commodity prices have increased dramatically and persistently over the past several years, followed by a sharp reversal in recent months. These large and persistent movements in commodity prices raise questions about their implications for global inflation. The process of globalization has motivated much debate over whether global factors have become more important in driving the inflation process. Since commodity prices respond to global demand and supply conditions, they are a potential channel through which foreign shocks could influence domestic inflation. The author assesses whether commodity prices can be used as effective leading indicators of inflation by evaluating their predictive content in seven major industrialized economies. She finds that, since the mid-1990s in those economies, commodity prices have provided significant signals for inflation. While short-term increases in commodity prices can signal inflationary pressures as early as the following quarter, the size of this link is relatively small and declines over time. The results suggest that monetary policy has generally accommodated the direct effects of short-term commodity price movements on total inflation. While indirect effects of short-term commodity price movements on core inflation have remained relatively muted, more persistent movements appear to influence inflation expectations and signal changes in both total and core inflation at horizons relevant for monetary policy. The results also suggest that commodity price movements may provide larger signals for inflation in the commodity-exporting countries examined than in the commodity-importing economies.Business fluctuations and cycles; Economic models; Inflation and prices; International topics; Transmission of monetary policy

Understanding the World Trade Collapse

The collapse in world trade volumes at the end of 2008 and beginning of 2009 was exceptional by historical standards. This paper shows that world demand (to which trade has become more responsive in recent decades) can explain most of the collapse in world trade, but that tight credit conditions have likely amplified the short-term trade response. Credit tightening likely accelerated the trade decline through trade finance constraints and its relatively larger impact on trade-intensive sectors. A portion of the trade decline remains unexplained, which may reflect a possible breakdown in global supply chains. Looking ahead, the pace of normalisation in financial conditions and the future evolution of global supply integration will affect the speed of recovery in trade and global output. Comprendre l'effondrement du commerce mondial L’effondrement du volume des échanges mondiaux à la fin de 2008 et au début de 2009 est exceptionnel dans une perspective historique. Ce document montre que l’essentiel de cet effondrement peut s’expliquer par une baisse de la demande mondiale (à laquelle le commerce est devenu plus réactif au cours des dernières décennies), mais que le resserrement des conditions de crédit a probablement joué un rôle important. La raréfaction du crédit a vraisemblablement accéléré la chute du commerce via son impact sur le financement des échanges et son impact relativement plus prononcé sur les secteurs les plus intenses en commerce. Une partie de la chute du commerce demeure inexpliquée, et pourrait refléter une rupture de chaînes d'approvisionnement mondiales. Pour l'avenir, le rythme de la normalisation dans les conditions financières et de l’évolution future de l’intégration de la production mondiale affectera la vitesse de la reprise du commerce et de la production mondiale.international trade, financial crisis, vertical supply, trade elasticity, élasticité du commerce, intégration verticale, crise financière, commerce international

Structural and Cyclical Factors behind Current-Account Balances

Global external imbalances widened persistently over the last several years and have narrowed abruptly over the course of the financial crisis. Understanding the extent to which structural or cyclical factors may have driven these patterns is important to assess the likely evolution of global imbalances going forward, as well as the potential adjustment that can be achieved through changes in policy. This paper assesses the link between structural and cyclical factors and current-account balances using a panel of 94 countries from 1973 to 2008. We find that the medium-term evolution of global external imbalances can be related in large part to structural factors including cross-country differences in demographics, fiscal deficits, oil dependency and intensity, stage of economic development, financial market development, and institutional quality. Part of the narrowing in current-account balances since the financial crisis appears to be related to various cyclical factors including changes in output growth, oil prices, and exchange rates, and may be expected to reverse alongside the economic recovery. Les facteurs structurels et cycliques derrière l'évolution des comptes courantsGlobal external imbalances widened persistently over the last several years and have narrowed abruptly over the course of the financial crisis. Understanding the extent to whic Des déséquilibres externes mondiaux se sont élargis constamment au cours des dernières années et puis se sont réduits abruptement au cours de la crise financière. Comprendre dans quelle mesure des facteurs structurels ou cycliques ont conduit ces évolutions est important pour évaluer l'évolution probable des déséquilibres mondiaux à l’avenir, ainsi que l'ajustement potentiel qui peut être réalisé par des changements de la politique. Cette étude évalue les facteurs structurels et cycliques qui influencent des balances courantes en utilisant un panneau de 94 pays de 1973 à 2008. Nous constatons que l'évolution à moyen terme des déséquilibres externes mondiaux a été conduite en grande partie par des facteurs structurels comprenant des différences internationales dans la démographie, les déficits publics, la dépendance et l'intensité en pétrole, le niveau de développement économique, le développement des marchés financiers, et la qualité institutionnelle. Une partie du rétrécissement des équilibres de compte courant depuis la crise financière semble être liée à de divers facteurs cycliques comprenant des changements dans la croissance de la production, le prix du pétrole, et les taux de change, et pourrait s’inverser avec la reprise économique.ccurrent account, global imbalances, déséquilibres mondiaux, compte courant