Macroeconomic Forecasting in Small Open

Economies Using Dynamic Factor Models

David Chernin Markus Kirchner

Central Bank of Chile

April 2017

PRELIMINARY DRAFT

Abstract

This paper proposes a new methodology for macroeconomic forecasting in a small open
economy environment based on dynamic factor models (DFMs). Unlike in existing appli-
cations of DFMs for forecasting in small open economies, the proposed methodology allows
for block exogeneity restrictions reflecting that external variables can be taken as exogenous
for domestic variables in a small open economy. The proposed methodology is applied to
forecast real GDP growth and consumer price inflation in Chile, using a large dataset of
domestic and external macroeconomic time series. Out-of-sample forecast comparisons sug-
gest considerable gains in terms of forecast accuracy from incorporating block exogeneity
restrictions, as the restricted DFM produces significantly smaller forecast errors than its
unrestricted version at a medium-term horizon relevant for macroeconomic policy.

Keywords: Factor models; Time series models; Forecasting; Small open economies.

JEL classification: C32; C51; C52; C53; E37.

We would like to thank Elas Albagli, Javier Garca-Cicco, Alberto Naudon and seminar participants at the
Central Bank of Chile for useful comments. The views expressed are those of the authors and do not necessarily
represent official positions of the Central Bank of Chile or its Board members.

Phone: +56 22 670 2731; e-mail address: dchernin@bcentral.cl.

Phone: +56 22 670 2193; e-mail address: mkirchner@bcentral.cl.

Address: Agustinas 1180, Santiago, Chile.
1 Introduction

In this paper we propose a new methodology for macroeconomic forecasting in a small open
economy environment based on dynamic factor models (DFMs). DFMs are often adopted for
macroeconomic forecasting (see Eickmeier and Ziegler, 2008). These models allow to capture
the dynamics of a large number of variables through a few latent factors. Thereby, the number
of estimated parameters does not increase as quickly with the number of variables as in other
multivariate time series models, implying potential gains in terms of forecast accuracy. However,
most existing applications of DFMs for forecasting in small open economies do not impose the
theoretical restriction that foreign variables can be taken as exogenous for domestic variables in
a small open economy, and might thus leave additional accuracy gains unexploited. We therefore
aim to assess the benefits of explicitly incorporating this kind of small open economy restrictions
through an application of the proposed methodology for Chile.
The application focuses on forecasting quarterly real gross domestic product (GDP) growth
and consumer price index (CPI) inflation in Chile. Our dataset starts with the introduction of
the Chilean inflation targeting monetary framework in 2001, and includes a broad set of quarterly
macroeconomic indicators with 114 domestic and 64 international variables. These variables are
modelled using a DFM. Only 3 domestic and 3 foreign factors are sufficient to explain about 50%
of the variability of the underlying macroeconomic indicators. However, while the unrestricted
version of our specified DFM would have more than 1,100 parameters to be estimated, the small
open economy restrictions that we impose allow to reduce the number of parameters by about a
third and thereby yields a significantly more parsimonious framework.
We compare the restricted DFM with its unrestricted version and several simple univariate
benchmark models in terms of their out-of-sample forecast performance for real GDP growth
and CPI inflation, conducting recursive regressions and computing the implied forecasts up to 8
quarters ahead in a pseudo real-time setup. We find that the restricted DFM significantly out-
performs the unrestricted model in terms of forecast accuracy, according to standard statistical
tests on the root mean squared errors for the point forecasts. In addition, the restricted DFM
beats the univariate benchmarks for GDP forecasts at medium-term horizons, while it tends to
produce similar forecast errors as the benchmarks for CPI inflation.
Several previous studies have applied DFM frameworks and other types of multivariate factor
models for macroeconomic forecasting in small open economies; see, for instance, Marcellino,
Stock, and Watson (2003) for several euro area countries, Brisson, Campbell, and Galbraith
(2003), Cheung and Demers (2007) and Gosselin and Tkacz (2010) for Canada, Camacho and
Sancho (2003) for Spain, Artis, Banerjee, and Marcellino (2005) for the United Kingdom, Ferreira,

1
Bierens, and Castelar (2005) for Brazil, Matheson (2006) and Giannone and Matheson (2007)
for New Zealand, Moser, Rumler, and Scharler (2007) for Austria, Bandt, Michaux, Bruneau,
and Flageollet (2007) for France, Chow and Choy (2009) for Singapore, Gupta and Kabundi
(2010) for South Africa, Martinsen, Ravazzolo, and Wulfsberg (2014) for Norway, and Aguirre
and Cspedes (2004) and Echavarra and Gonzlez (2011) for Chile. However, while theoretical
small open economy (i.e., block exogeneity) restrictions have often been applied in studies based
on structural factor-augmented vector autoregressive (FAVAR) models (see, e.g., Boivin and
Giannoni, 2007; Charnavoki and Dolado, 2014; Kamber, Karagedikli, Ryan, and Vehbi, 2016), to
our knowledge none of the available studies on forecasting has explored the usefulness of block
exogeneity restrictions in a small open economy environment, as we do in this paper.
The result that (restricted) DFMs can be useful devices for macroeconomic forecasting at
medium-term horizons, even in a relatively short sample such as ours, is especially relevant for a
small open emerging economy with an inflation targeting monetary framework such as Chile. In
particular, the Central Bank of Chile (CBCH) is conducting forecasts of real GDP and inflation
up to a two-year horizon, which is the maximum period during which the CBCH normally
attempts to take the projected annual consumer price inflation rate back to 3% (CBCH, 2007),
an operational definition of price stability that is paralleled (with different specified targets and
policy horizons) in many other small open economies (see Hammond, 2012).1 Reliable forecasts
of macroeconomic variables are therefore a key requirement for a successful implementation of
inflation targeting frameworks. However, given the relatively short available time series in many
emerging economies compared to most advanced economies and the relatively recent adoption of
inflation targeting regimes in most cases, it seems important that the models used for forecasting
in such an environment are specified in a parsimonious way, for instance, by exploiting potentially
useful theoretical (e.g., small open economy) restrictions in popular forecasting models such as
DFMs. Our results support that hypothesis for the case of Chile.
The rest of the paper is structured as follows. Section 2 describes the model and its estimation.
Section 3 presents our empirical application and results. Finally, Section 4 concludes.

2 Econometric Model

In this section we describe the dynamic factor model with block exogeneity restrictions and its
estimation. The model assumes that the latent factor dynamics follow a vector autoregressive
(VAR) process and that the (explicit) relationship between the latent factors and the observed
1
This kind of central bank decision-making process is often called inflation-forecast targeting (Svensson,
2002).

2
set of macroeconomic indicators is contemporaneous. Since our goal is to produce forecasts for
a small open economy, we consider two blocks: domestic and external. We impose a structure
that allows spillover effects from the external block onto the domestic block, but not vice-versa.

2.1 The Dynamic Factor Model (DFM) with block exogeneity restrictions

Let XtD represent an N D 1 vector of domestic macroeconomic time series (domestic block) and
XtE an N E 1 vector of external macroeconomic time series (external block). Data is available
for t = 1, ..., T, and all elements in XtD and XtE are assumed to be standardized and properly
differentiated, such that they are rendered to stationary processes. Also, let the information
in XtD and XtE be summarized by the latent factors FtD and FtE , respectively, where FtD is a
K D 1 vector of domestic factors and FtE is a K E 1 vector of external factors. The dimensions
of FtD and FtE are such that K D N D and K E N E . We assume that XtD and XtE admit a
factor model representation given by:

XtE EE 0 FtE eE
t
= + , (1)
XtD ED DD FtD eD
t

where EE , ED and DD are conformable matrices of factor loadings, and the idiosyncratic
innovations in eE D
t and et are allowed to follow univariate autoregressions as in Stock and Watson

(2010):
i (L) eji,t = j + vi,t , i = 1, . . . , N j , (2)

where j {E, D}, i (L) are conformable lag polynomials of finite order, j are constants,
and vi,t are i.i.d. disturbances such that vt N (0, v ) with v diagonal. The presence (and
structure) of serial correlation in the idiosyncratic innovations of (1) will be determined on a
case-by-case basis, using standard univariate serial correlation tests. This type of specification is
often called an exact factor model, and can be thought of as a version of the model introduced
by Chamberlain and Rothschild (1983) without cross-correlation in the error terms.
We further assume that the joint dynamics of the latent factors are given by the following
reduced-form VAR:

EE
(L) 0 FtE E E
t
= + , (3)
ED DD
(L) (L) FtD D D
t

where (L)EE , (L)ED and (L)DD are conformable lag polynomials of finite order p, E and
D are constant terms, and the reduced-form innovations E D
t and t may be cross-correlated,

3

such that [E D
t , t ] N (0, ). Finally, we assume that E[et ts ] = 0 s.

Equations (1), (2) and (3) represent our DFM framework, which we will use to construct
forecasts for the Chilean economy. The specification of (1) ensures that we capture the contem-
poraneous effects that the external factors exert upon the domestic block of observables through
the matrix ED . In turn, the block of zeros in the upper right region of the factor loadings
matrix reflects our small open economy assumption, imposing that the evolution of the domestic
factors has no impact on the external block of observables. Similarly, the specification of (3)
ensures that there is no dependence of the external factors with respect to the domestic ones.
Most of the available literature for small open economies that employs DFMs with block
exogeneity restrictions such as in (1) and (3) addresses structural impulse response analysis
based on identified FAVARs. However, the imposition of block exogeneity restrictions may
also be useful in a forecasting application of DFMs: by focusing on a small open economy
we may assume absence of spillovers (both past and present) from the domestic factors onto
the external factors, and from the domestic factors onto the external block of macroeconomic
indicators. This should result in efficiency gains for the parameter estimates, due to the associated
dimensionality reduction of the econometric problem. On the other hand, the risk of potential
model misspecification (and thus presence of biased and inconsistent estimates) is relatively low
given the factual nature of the small open economy assumption.

2.2 Estimation

We now discuss the main issues regarding parameter estimation involving (1), (2) and (3). For

this, it is useful to define X E = [X1E , . . . , XTE ] as the T N E matrix of external time series,

F E = [F1E , . . . , FTE ] as the T K E matrix of external factors, X D = [X1D , ..., XTD ] as the

T N D matrix of domestic time series, and F D = [F1D , ..., FTD ] as the T K D matrix of domestic
factors. Furthermore, for the version of the model without block exogeneity restrictions, to which

we will refer to as unrestricted DFM, we define a T N matrix X = [X1 , . . . , XT ] including

the full set of external and domestic observables in Xt = [XtE , XtD ] for t = 1, . . . , T (with

N = NE + ND ), and accordingly a T K factor matrix F = [F1 , ..., FT ] and an unrestricted
N K matrix of factor loadings (where we will set K = KE + KD in our application).

2.2.1 Identification

The model defined by (1), (2) and (3) is econometrically not identified and thus cannot be
Ft }T be a solution to the estimation
estimated. To see this, without loss of generality let {, t=1

of the unrestricted version of (1). This implies that there always exists an arbitrary non-singular

4
 Ft }T defined by Ft = H 1 Ft for t = 1, . . . , T and = H
matrix H such that the set {,
t=1

is also a solution to the estimation problem. Therefore, an additional set of restrictions is

required for proper identification. Stock and Watson (2002) demonstrated that the estimation
of factor models via principal components resolves this identification problem by providing the
required identifying restrictions. Principal component estimation consists in associating with
the ordered orthonormal eigenvectors of the (estimated) covariance matrix of the observables
(after standardization). The factors Ft are then obtained as the projection of the observables
Accordingly, this statistical procedure imposes non-singular limiting values (as both
over .
N, T ) for the norm of and the variance of Ft , which together with other necessary
conditions (namely, bounded loadings and consistency for the covariance estimator of Ft ), reduce
H to an orthonormal diagonal matrix with elements equal to 1. This identifies the factors up
to a change of sign. We refer to Stock and Watson (2002) for a more detailed discussion.
Hence, we use the restrictions implied by principal components estimation for Ft and ,

following most the DFM literature. A useful feature of this identification scheme is that, even
though the contemporary factors are orthogonal, serial and lagged cross-correlation between
them is still present, maintaining therefore their suitability for VAR forecasting.2

2.2.2 External block

The estimation via principal components of the external factors and their associated loadings
relies on the covariance matrix of the observables. More specifically, the covariance matrix
d E ) = X E X E /(T 1). Then, EE
of the standarized variables X E is estimated as Cov(X
d E ), normalized and ordered decreasingly. It can be
is estimated as the eigenvectors of Cov(X
shown that the eigenvalues associated with these eigenvectors represent the portion of the total
variance explained by each of the factors.3 Once EE is ready, the factors are estimated as linear
combinations of X E , where the weights correspond to the factor loadings: F E = X E EE .
Up to this point, F E spans the same space as X E . The previous procedure simply constitues a
rotation of X E , and thus, generates the same number of factors as observables (i.e., K E = N E ).
However, since our goal is to summarize information, it is necessary to remove factors and
loadings, while minimizing the loss of explained variance. Since the eigenvalues associated with
the eigenvectors in EE represent the portion of the total variance in X E explained by each
of the factors, the first obvious candidate for elimination is the eigenvector associated with the
lowest eigenvalue (which corresponds to the last column of EE and FE , respectively). This
2
For further references regarding identification see Bai and Ng (2013).
3 d
Since Cov(X E
) is by construction a real symmetric matrix, its eigenvectors will be real and orthogonal,
d
which alongside their normalization, render EE to be an orthonormal basis of the space spanned by Cov(X E
).
d
Furthermore, since Cov(X E
) is positive definite, all its eigenvalues will be positive.

5
elimination step is repeated until the desired number of factors is achieved (see Section 3.2.1).

2.2.3 Domestic block

Once the external factors and loadings are estimated, it is possible to estimate the domestic block
imposing the block exogeneity restrictions present in (1). This is done following the iterative
approach proposed by Boivin and Giannoni (2007); see also Charnavoki and Dolado (2014) and
Kamber et al. (2016). The idea behind this approach is that the estimated external factors
can be used to orthogonalize (or externally correct) the estimated domestic factors, so as to
control for the effect of foreign factors on the domestic block. This guarantees that the estimated
domestic factors capture only the dynamics in the domestic variables not captured by the foreign
factors. Formally, this is achieved using the following iterative approach:

D(0) T
1. Estimate {EE , FtE }Tt=1 and {DD(0) , Ft }t=1 via principal components independently
following the estimation procedure described in Section 2.2.2 (suitably adapted for the
domestic block) to obtain K E external and K D domestic factors.

D(i)
2. For i = 0, regress XtD on FtE and Ft using Ordinary Least Squares (OLS) to obtain
ED(i) (which corresponds to the OLS coefficients associated with FtE ).

D(i) = X D ED(i) F E .
3. Compute Xt t t

D(i+1) T D(i) .
4. Estimate {DD(i+1) , Ft }t=1 using the first K D principal components of Xt

D(i+1) T
5. Repeat steps 2-4 for i = 1, 2, 3, . . . , until convergence of {Ft }t=1 .

2.2.4 Vector autoregressions

The block exogeneity restrictions present in the VAR from (3) are imposed by a reparametrization
of the unrestricted version of (3) that contains the desired linear constraints (i.e., exogeneity of the
external factors with respect to the domestic factors). As a consequence of this reparametrization,
not all the regressors are shared throughout all the equations present in the system. Thus,
standard equation-by-equation OLS does not yield efficient parameter estimates.4 This issue can
be tackled by applying Feasible Generalized Least Squares (FGLS), which yields asymptotically
efficient and consistent parameter estimates by estimating the covariance matrix of the residuals
via an iterative approach. Also, since the VAR under consideration is stationary, standard
asymptotic inference continues to apply. For further details see, e.g., Ltkepohl (2007).
4
See Zellner (1962) for a complete discussion.

6
2.2.5 Unrestricted DFM

The estimation of the unrestricted DFM encompasses similar steps as the ones described pre-
viously. Under this case, however, the estimated loadings are extracted from the complete
standarized dataset X, which includes all external and domestic observables. This yields the
resulting estimated eigenvalues (and their corresponding eigenvectors) to be associated with the
joint dispersion of all the variables under consideration. Consequently, F constitutes linear
combinations of both external and domestic observables. Once the factors F are available, the
unrestricted VAR which models their joint dynamics is estimated. Unlike for the VAR with block
exogeneity restrictions, equation-by-equation OLS yields asymptotically efficient and consistent
parameter estimates, given that the regressors are shared across all equations (Zellner, 1962).

2.3 Forecasts

Forecasts from (3) are obtained using a standard recursive scheme, in which the point forecast
corresponds to the conditional mean of each variable given the current information set. The
sample under consideration is quarterly, and forecasts for time horizons ranging from 1 up to 8
quarters ahead are computed. Point forecasts for the observables are then obtained by projecting
the forecasts from (3) onto the observables using the estimated loadings matrix, and adding the
forecasts for the idiosyncratic innovations from (2).
Formally, consider for simplicity the forecasts of the unrestricted DFM, in which the lag
polynomials, the idiosyncratic innovations of (1) and the cross-correlated error terms of (3) are
given by (L), et and t respectively, and are analogous to their counterparts from the restricted
DFM. Then, the forecasts of the observable i are determined by:

E [Xi,t |Xi,t1 , ...] = E[i Ft + ei,t |Xi,t1 , ...]

= E[i (L)Ft |Xi,t1 , ...] + E[i (L)ei,t |Xi,t1 , ...]

= E[i (L)Ft |Xi,t1 , ...] + E[i (L)(Xi,t i (L)Ft )|Xi,t1 , ...], (4)

The last equality above follows from the assumption that E[et tj ] = 0 j, alongside the i.i.d.
assumptions for vi,t and t . As (4) shows, under this framework, the correlation among the series
of observables in Xt only occurs through the factors Ft . However, in those cases in which ei,t is
serially correlated, the term E [ei,t |Xt1 , ...] leads to the appearance of lagged terms of Xi,t in
the forecast equation.

7
3 Empirical Implementation and Results

In this section we present our empirical implementation and results for Chile, focusing on real
GDP and CPI forecasts. The model specification, which includes determining the number of
factors in (1), the number of lags in (3) and the autocorrelation structure of (2) is determined
considering the complete sample. In the pseudo real-time setup for the forecast accuracy assess-
ment, we maintain the model specification selected for the complete sample.

3.1 Data

The data used for the estimation of the DFM is a balanced panel of 178 quarterly series for the
period from 2001Q1 to 2016Q3. The starting point for this panel coincides with the kick-off of
Chiles inflation targeting monetary framework. The data series are divided into external and
domestic variables. The external block comprises 64 international series that are categorized
into 14 groups: GDP, consumption, investment, government expenditure, prices, unemployment,
foreign trade, monetary policy rates, real exchange rates, sovereign bond yields, stock market
indicators, sectoral economic indicators, commodity prices, and volatility indexes. With the ex-
ception of the latter two, all other groups include variables (when available) from China, the
United States, Japan and the euro area, which combined constitute 63% of Chiles total foreign
trade.5 The domestic block includes 114 series, divided into 13 groups: GDP, sectoral economic
indicators, expenditure, prices, employment, other labor market indicators, wages, credit, mon-
etary aggregates, interest rates, stock market, exchange rates and economic surveys. All data
series are transformed to induce stationarity, demeaned and standardized prior to the estima-
tion. Finally, the variables present in the external block were mostly retrieved using Bloomberg,
whereas the domestic variables were obtained through the CBCHs statistical database.6 The
complete list of data series and description of data transformations is provided in the appendix.

3.2 Model specification

3.2.1 Number of factors

We determine the total number of factors jointly based on the criteria proposed by Bai and Ng
(2002), which we compute for different combinations of domestic and foreign factors, as well as
the implied explained variance. Bai and Ng (2002) propose selecting the K factors of X based on
information criteria. The idea is to assess the trade-off between the benefit in increased goodness-
5
Source: Ministry of Foreign Affairs of Chile, General Directorate for International Economic Relations (DI-
RECON), Foreign Trade Quarterly Report, February 2017.
6
See http://si3.bcentral.cl/Siete/secure/cuadros/home.aspx?Idioma=en-US.

8
 Table 1: Bai and Ng (2002) selection criteria for the DFM with block exogeneity.

Penalty function g1 (N, T )

KD = 1 KD = 2 KD = 3 KD = 4 KD = 5
KE =1 -0.115 -0.113 -0.101 -0.069 -0.032
KE =2 -0.145 -0.145 -0.121 -0.089 -0.056
KE =3 -0.147 -0.154 -0.132 -0.102 -0.066
KE =4 -0.136 -0.139 -0.121 -0.089 -0.056
KE =5 -0.110 -0.117 -0.102 -0.072 -0.041
Penalty function g2 (N, T )
KD = 1 KD = 2 KD = 3 KD = 4 KD = 5
KE =1 -0.102 -0.093 -0.075 -0.036 0.007
KE =2 -0.126 -0.119 -0.088 -0.050 -0.011
KE =3 -0.121 -0.122 -0.093 -0.057 -0.014
KE =4 -0.104 -0.100 -0.076 -0.037 0.003
KE =5 -0.071 -0.071 -0.050 -0.013 0.024
Penalty function g3 (N, T )
KD = 1 KD = 2 KD = 3 KD = 4 KD = 5
KE =1 -0.149 -0.163 -0.168 -0.152 -0.132
KE =2 -0.195 -0.212 -0.204 -0.189 -0.173
KE =3 -0.214 -0.238 -0.232 -0.219 -0.199
KE =4 -0.220 -0.239 -0.238 -0.223 -0.206
KE =5 -0.210 -0.233 -0.236 -0.222 -0.208

Note: KD and KE , respectively, indicate the number of domestic and external factors considered.

of-fit through including an additional factor, against the associated cost in parametric variability
arising from its inclusion. This is done by minimizing the following penalized likelihood (or log
sum of squares):
    
1

IC (K) = ln tr X F X F + Kg (N, T ) , (5)
NT

where g(N, T ) is a penalty factor such that g(N, T ) 0 and min{N, T }g(N, T ) as N, T
. Bai and Ng (2002) show that the value of K that minimizes an information criterion for
is a consistent estimate for the true
given g(N, T ) satisfying these conditions, denoted by K,
value of K, assuming the latter is finite and does not increase with N, T . Following Stock and
Watson (2002), we use three of the penalty functions suggested by Bai and Ng (2002):
   
N +T NT
g1 (N, T ) = ln , (6)
NT N +T
 
N +T
g2 (N, T ) = ln (min {N, T }) , (7)
NT

9
 Table 2: Bai and Ng (2002) selection criteria for the unrestricted DFM.

Penalty functions
g1 (N, T ) g2 (N, T ) g3 (N, T )
K =1 -0.105 -0.098 -0.121
K =2 -0.156 -0.143 -0.189
K =3 -0.201 -0.181 -0.251
K =4 -0.206 -0.180 -0.272
K =5 -0.215 -0.183 -0.299
K =6 -0.210 -0.171 -0.310
K =7 -0.205 -0.159 -0.321
K =8 -0.184 -0.132 -0.318
K =9 -0.164 -0.106 -0.314
K = 10 -0.142 -0.077 -0.309

Note: K indicates the number of factors considered.

 
ln min {N, T }2
g3 (N, T ) = . (8)
min {N, T }2
For the case of the restricted DFM, we estimate the joint information criteria of Bai and Ng
(2002) applying the subsequent iterative steps:

E(i)
1. For i = 1, compute {EE(i) , Ft }Tt=1 via principal components, following the estimation
procedure described in Section 2.2.2 to obtain i external factors.

E(i) D(j) T
2. Given {EE(i) , Ft }Tt=1 , for j = 1 apply steps 2-5 of Section 2.2.3 to obtain {DD(j) , Ft }t=1 ,
the set of externally-corrected domestic factors and loadings.

E(i) D(j) T
3. Join {EE(i) , Ft }Tt=1 and {DD(j) , Ft Ft }T and compute the information
}t=1 in {, t=1

criterion from (5), using the penalty functions specified in (6), (7) and (8).

4. Repeat steps 1-3 for i = 2, 3, 4, . . . and j = 2, 3, 4, . . . until the desired maximum number
of external/domestic factors is reached.

Table 1 documents the resulting statistics for the restricted DFM. The joint information
criteria suggest fairly parsimonious specifications: all three penalty functions generate elliptic
paraboloids (within the range analyzed) with minimums at relatively low values of KE and KD .
For the penalty function g1 , the preferred specification has 3 external and 2 domestic factors.
Penalty function g2 implies the most parsimonious specification, with 2 external factors and 1
domestic factor. Finally, penalty function g3 suggests 4 external and 2 domestic factors. For the
case of the unrestricted DFM, Table 2 shows that specifications with 5 factors (functions g1 and
g2 ) or 7 factors (function g3 ) are preferred according to the information criteria.

10
 External Block

Explanied variance by PC
0.5

0
10 20 30 40 50 60
Domestic Block
1

0.5

0
10 20 30 40 50 60 70 80 90 100 110
Unrestricted
1

0.5

0
20 40 60 80 100 120 140 160
Number of factors

Figure 1: Explained variance for the external and domestic observables (NE = 64 and ND = 114)
in the restricted DFM, and all observables (N = 178) in the unrestricted DFM. Note: The
selected number of factors, highlighted by the horizontal lines, corresponds to KE = 3, KD = 3
and K = 6, respectively. Under these specifications, the amount of total explained variance is:
45,1% for the external block and 49.5% for the domestic (externally-corrected) block in the
restricted DFM, and 50% for the complete dataset in the unrestricted DFM.

Although in general desirable, parsimonious specifications have some caveats in DFMs. The
overall level of explained variance attained by the principal components estimator is a monotoni-
cally increasing and concave function of the number of factors. Thus, specifications that consider
a very small number of factors are only able to explain a small fraction of the total variance of
the observables. This leads to potential presence of strong cross-correlations in the idiosyncratic
innovations of (1) and lower forecasting power. We amend this issue by defining an ad-hoc
minimum threshold level for explained variance in each block, which we combine with the infor-
mation of Tables 1 and 2. Given that we want to maintain the models structure as parsimonious
as possible, we set that ad-hoc level of minimum explained variance at around 50%. Under this
constraint, the specification that achieves the optimal averaged value for the information criteria
over the three penalty functions is: KE = 3 and KD = 3. For the latter, the total explained
variances for the external and domestic blocks reach 45.1% and 49.5% respectively. This can be

11
 Table 3: Schwarz information criteria for vector autoregression.

DF Mr DF Mu
p=0 13.34 15.53
p=1 9.52 8.91
p=2 9.91 10.25
p=3 10.95 11.36
p=4 10.59 11.70

Note: p indicates the lag order of the VAR, and DF Mr and DF Mu refer to the restricted and
unrestricted DFM, respectively.

seen in Figure 1, which shows the level of explained variance for every combination of factors in
each block, alongside the resulting explained variance for the selected specification (horizontal
line). For the unrestricted DFM, we set K = 6 to achieve a level of explained variance of 50%.

3.2.2 VAR order

The number of lags p considered for the VAR from (2) is determined using the Schwarz-Bayesian
information criterion. We choose this criterion over other common alternatives present in the
literature (e.g., Akaike information criterion) based on: (1) its consistency and (2) its tendency
towards choosing parsimonious specifications. The results are shown in Table 3 and suggest that
the optimal specification includes only 1 lag for both versions of the model.

3.2.3 Autoregressive structure of idiosyncratic innovations

Once the factors and loadings of (1) are computed, the series of idiosyncratic innovations for
observable i can be obtained as: eE E EE FtE if i belongs to the external block (the
i,t = Xi,t i

expression for the unrestricted model is akin), or eD D ED F E i DD F D if i belongs to

i,t = Xi,t i t t

the domestic block.7 Then, standard serial correlation tests are conducted, so as to determine
(on a case-by-case basis) if the imposition of an autoregressive structure for the idiosyncratic
innovations is warranted. In that case, the parameters of the univariate model i (L) are esti-
mated using OLS. We choose the Lagrange multiplier (LM) test, setting the lag order pLM of
the auxiliary regression to 4. We compute the LM-statistic,8 which is asymptotically distributed
as 2 (pLM ), and assess its statistical significance considering a 5% confidence level.9
Table 4 exhibits the LM test results under different specifications for the idiosyncratic inno-
vations of the real GDP growth rate and the CPI inflation rate. The results for the real GDP
7
The subscript i used in the loadings matrices denotes their i-th row.
8
The LM-statistic is defined as obs R2 , where obs denotes the number of observations and R2 the uncentered
coefficient of determination of the auxiliary regression.
9
This confidence level is maintained throughout this paper.

12
 Table 4: Serial correlation (Lagrange multiplier) tests for idiosyncratic innovations.

GDP CPI
DF Mr DF Mu DF Mr DF Mu
AR(0) AR(0) AR(0) AR(1) AR(0)
LM-statistic 3.95 0.78 10.80 6.21 5.64
Prob. 2 (4) 0.41 0.94 0.03 0.18 0.23

Note: The null hypothesis of the Lagrange multiplier (LM) test is absence of residual serial
correlation. The test statistic has a chi-squared distribution with 4 degrees of freedom. AR(0)
indicates a white noise specification, while AR(1) indicates an autoregressive specification of
order 1. DF Mr and DF Mu refer to the restricted and unrestricted DFM, respectively.

growth rate suggest that there is no need to impose additional innovation structure for that vari-
able. The null (absence of serial correlation) is not rejected for both versions of the DFM. Hence,
we use a white noise specification for real GDP growth. In turn, the p-values associated with the
test for the CPI inflation rate under the restricted DFM fall inside the rejection region of the
null at a 5% confidence level. Consequently, an AR(1) structure is imposed for CPI inflation,
which effectively renders the innovations to white noise according to the test results for that
specification. Finally, the unrestricted DFM exhibits white noise innovations for both variables
considered according to the LM test, and therefore, no further residual autocorrelation structure
is included in the case of the unrestricted DFM.

3.3 Recursive forecasts

Recursive forecasts are computed using 24 samples, going from 2001Q1-2010Q4 up to 2001Q1-
2016Q3 (the latter corresponds to the complete dataset). We use an incremental scheme, given
the relatively narrow set of observations at hand. The model is reestimated at every iteration,
and recursive out-of-sample forecasts of 1 up to 8 quarters ahead are generated at each step.
We compute the implied root mean squared errors (RMSEs) of the real GDP growth and CPI
inflation forecasts for each of the time horizons under consideration. We conduct this recursive
forecasting exercise for both versions of the DFM, as well as for five univariate benchmark models:
AR(1), AR(2), AR(3), AR(4) and a random walk (RW) specification.
In order to formally assess the forecast accuracy of the aforementioned set of models, we
apply the modified version of the Diebold-Mariano (DM) test proposed by Harvey, Leybourne,
and Newbold (1997). Through simulation experiments, Diebold and Mariano (1995) showed that
the normal distribution can be a very poor approximation of the DM tests finite-sample null
distribution. Their results indicate that the DM test can have the wrong size and generate a

13
 GDP growth - restricted
0.04

0.02

2002 2004 2006 2008 2010 2012 2014 2016 2018

GDP growth - unrestricted

0.04

0.02

2002 2004 2006 2008 2010 2012 2014 2016 2018

Actuals Forecasts

Figure 2: Recursive forecasts for real GDP growth with KE = 3, KD = 3 (restricted DFM) and
K = 6 (unrestricted DFM). Note: Recursive forecasts generated using an incremental window
scheme for 1-8 steps ahead.

bias towards type I errors depending on the degree of serial correlation among the forecast errors
and the sample size. In turn, the modified DM test has better small-sample properties by: (1)
making a bias correction to the DM test statistic and (2) comparing the corrected statistic with
a Students t-distribution. We refer to Harvey et al. (1997) for a complete discussion.

3.3.1 Results for real GDP growth

Figure 2 displays the results (point forecasts) from the recursive exercise for real GDP growth.
The results show that the unrestricted DFM tends to overpredict the observed growth rates
towards the end of the sample, unlike the restricted DFM. In general, the unrestricted model
seems to produce more dispersed forecasts compared to the restricted model, which might be
due to the relatively heavy parameterization of the unrestricted model.
The implied RMSEs and prediction equality tests for real GDP growth are exhibited in the
top panels of Tables 5 and 6.10 These results suggest that for GDP forecasts, the restricted DFM
10
Table 6 exhibits blank values for forecast horizons in which the RMSEs implied by the restricted DFM are

14
 Table 5: Root mean squared errors (103 ) of recursive forecasts.

GDP growth forecasts

DF Mr DF Mu AR(1) AR(2) AR(3) AR(4) RW
h=1 8.42 7.08 7.61 7.88 7.93 7.97 10.33
h=2 7.89 8.08 7.46 7.67 7.76 7.85 8.30
h=3 7.55 8.59 7.68 7.80 7.73 7.81 9.05
h=4 6.83 7.90 7.85 7.94 7.97 8.06 9.48
h=5 5.50 7.10 7.00 7.15 7.23 7.30 7.57
h=6 5.74 7.52 7.25 7.41 7.47 7.46 10.79
h=7 5.67 7.00 7.22 7.42 7.51 7.48 8.12
h=8 5.89 7.09 7.48 7.67 7.78 7.71 9.72
CPI inflation forecasts
DF Mr DF Mu AR(1) AR(2) AR(3) AR(4) RW
h=1 4.22 4.41 4.21 4.48 4.48 4.48 4.91
h=2 4.03 4.75 4.18 4.27 4.29 4.29 5.17
h=3 3.85 5.04 4.19 4.12 4.09 4.09 5.25
h=4 3.95 4.85 4.68 4.47 4.38 4.38 6.83
h=5 4.64 5.03 4.54 4.45 4.41 4.41 6.40
h=6 4.85 4.96 4.64 4.55 4.51 4.51 6.75
h=7 4.77 4.94 4.54 4.49 4.48 4.48 6.59
h=8 4.79 4.61 4.49 4.44 4.43 4.43 6.66

Note: Root mean squared errors (1-8 steps ahead) for real GDP growth and CPI inflation
forecasts. These values where generated using an incremental window scheme ranging from
2001Q1-2010Q3 to 2001Q1-2016Q3.

(DF Mr ) outperforms the unrestricted DFM (DF Mu ) in terms of forecast accuracy at medium-
term forecast horizons. In particular, for forecast horizons of more than a few quarters the
RMSEs implied by the restricted DFM are considerably lower than the RMSEs implied by the
unrestricted model. The p-values from Table 6 show that statistically significant differences start
to appear for forecast horizons from 3 quarters onwards. Similarly, the restricted DFM beats all
univariate benchmark models considered starting from 4-step-ahead forecasts and onwards. In
addition, the results from Table 6 indicate that the improved performance of the restricted DFM
with respect to the univariate benchmarks is statistically significant.

3.3.2 Results for CPI inflation

Figure 3 displays the results from the recursive exercise for CPI inflation. The results are similar
to the ones for real GDP growth in that the restricted DFM seems to produce more accurate
forecasts. The larger dispersion and excessive persistence of the forecasts from the unrestricted
greater than the RMSEs from the unrestricted DFM.

15
 Table 6: Harvey et al. (1997) prediction equality tests for RMSEs, DF Mr vs. benchmarks.

GDP growth forecasts

DF Mu AR(1) AR(2) AR(3) AR(4) RW
h=1 0.071
h=2 0.370 0.330
h=3 0.048 0.430 0.384 0.412 0.374 0.128
h=4 0.020 0.027 0.032 0.036 0.023 0.003
h=5 0.007 0.001 0.001 0.001 0.001 0.003
h=6 0.000 0.007 0.006 0.006 0.006 0.000
h=7 0.000 0.000 0.000 0.000 0.000 0.003
h=8 0.000 0.000 0.000 0.000 0.000 0.001
CPI inflation forecasts
DF Mu AR(1) AR(2) AR(3) AR(4) RW
h=1 0.294 0.329 0.313 0.419 0.167
h=2 0.056 0.382 0.289 0.262 0.357 0.038
h=3 0.020 0.223 0.241 0.234 0.297 0.012
h=4 0.163 0.001 0.023 0.096 0.161 0.000
h=5 0.241 0.003
h=6 0.428 0.000
h=7 0.339 0.000
h=8 0.000

Note: p-values for the Harvey et al. (1997) prediction equality tests. The null hypothesis is
equal predictive ability between the restrictive DFM and the respective benchmark. Blanks are
left in those cases in which the RMSE implied by the benchmark resulted lower than the RMSE
from the restrictive DFM.

model is even more notorious in this case, generating apparent upward and downward biases in
the first and second half of the evaluation sample, respectively. These issues are corrected in the
more parsimonious restricted model specification.
The bottom panels of Tables 5 and 6 show the RMSEs and prediction equality tests for
the case of CPI inflation forecasts. The results suggest that the restricted DFM beats the
unrestricted DFM at almost every forecast horizon considered. Nevertheless, the differences
are only statistically significant for 3-step-ahead forecasts, partly due to the relatively large
dispersion of the RMSEs for CPI inflation. Similarly, the restricted DFM beats several of the
univariate benchmarks at short horizons of less than a year, although the differences are not
found to be statistically significant in most cases, with the exception of the random walk (where
the differences are significant for horizons from 2 quarters onwards).

16
 CPI inflation - restricted

0.02

0.01

-0.01
2002 2004 2006 2008 2010 2012 2014 2016 2018

CPI inflation - unrestricted

0.02

0.01

-0.01
2002 2004 2006 2008 2010 2012 2014 2016 2018
Actuals Forecasts

Figure 3: Recursive forecasts for CPI inflation with KE = 3, KD = 3 (restricted DFM) and
K = 6 (unrestricted DFM). Note: Recursive forecasts generated using an incremental window
scheme for 1-8 steps ahead.

3.4 Robustness

In order to assess the robustness of the results presented in Section 3.3, we compute the RMSEs
for several variations of our baseline specification of the DFM (KE = 3, KD = 3 for the restricted
version and K = 6 for the unrestricted version), for 1-8 step-ahead forecasts. The alternative
specifications are selected using the results of Tables 1 and 2 as reference. In both cases it
can seen that the lowest values for the information criteria are achieved for combinations of 4
and 5 factors. The results, exhibited in Figure 4, suggest that the restricted DFM continues to
outperform its unrestricted counterpart, even when (slightly) changing the factor specification of
the model. Specifically, for real GDP forecasts, Figure 4 reveals a consistent gap in the RMSEs
between the restricted and the unrestricted model, for medium-term forecast horizons. Regarding
the CPI inflation forecasts, a slight advantage is seen for the restricted model for relatively short
horizons.

17
 10-3 GDP growth

1 2 3 4 5 6 7 8

10-3 CPI inflation

4.5

1 2 3 4 5 6 7 8
Forecast horizon
base r base u alt1 r alt1 u alt2 r alt2 u alt3 r

Figure 4: RMSEs for different specifications of the DFM. Note: base r: KE = 3, KD = 3; base
u: K = 6; alt1 r: KE = 2, KD = 2; alt1 u: K = 4; alt2 r: KE = 2, KD = 3; alt2 u:
K = 5; alt3 r: KE = 3, KD = 2.

4 Conclusions

This paper has proposed a new methodology for macroeconomic forecasting in a small open
economy environment based on a dynamic factor model. The proposed methodology allows to
incorporate block exogeneity restrictions of external with respect to domestic observables, both
in the observation equation and the transition equation of the model, in order to replicate the
theoretical interaction among these two groups of variables in small open economies. In compar-
ison to standard unrestricted DFMs, this requires a number of modifications in the estimation
of the model and adaptations of specification tests.
An application for Chile focusing on forecasting real GDP growth and CPI inflation shows
that the restricted DFM significantly outperforms the unrestricted version of the model in terms
of the accuracy of point forecasts at medium-term horizons, according to standard statistical
tests. In addition, by incorporating block exogeneity restrictions the DFM is able to beat several
simple univariate benchmark models for real GDP forecasts and tends to produce similar fore-

18
cast errors for CPI inflation, whereas without the restrictions the model would produce inferior
forecasts than most of the benchmark models considered. Hence, based on this application we
conclude that small open economy restrictions can be a useful means to improve the forecast
performance of DFMs in a small open economy environment.

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21
A Data Appendix
The external series where directly taken from Bloomberg. In particular, country-specific data was ob-
tained through its World Economic Statistics feature. The domestic series were taken from the CBCHs
database. Table 7 summarizes this information. The transformation codes are: 0 - no transformation, 1 -
first differences, 2 - natural logarithms and 3 - first differences of natural logarithms. The sample ranges
from 2001Q1 to 2016Q3.

Table 7: Data description.

Id Mnemonic Transf. Series Description

EXTERNAL VARIABLES
Gross Domestic Product
1 GDP USA 3 Real GDP, Bill. of Chained (2009) US Dollars, United States, SA
2 GDP JPN 3 Real GDP, Bill. of Chained (2011) Yen, Japan, SA
3 GDP EZ 3 Real GDP, Mill. of Chained (2010) Euros, Eurozone, SA
4 GDP CHN 3 Real GDP Index, (2015Q6=150,000), China, SA
Consumption
5 CONS USA 3 Real Consumption, Bill. of Chained (2009) US Dollars, United States, SA
6 CONS JPN 3 Real Consumption, Bill. of Chained (2011) Yen, Japan, SA
7 CONS EZ 3 Real Consumption, Mill. of Chained (2010) Euros, Eurozone, SA
Investment
8 INV USA 3 Real Investment, Bill. of Chained (2009) US Dollars, United States, SA
9 INV JPN 3 Real Investment, Bill. of Chained (2011) Yen, Japan, SA
10 INV EZ 3 Real Investment, Mill. of Chained (2010) Euros, Eurozone, SA
11 INV CHN 3 Nominal Investment, Bill. of Yuans, China, SA
Government Expenditure
12 GOV USA 3 Real Gov. Expendit., Bill. of Chained (2009) US Dollars, United States, SA
13 GOV JPN 3 Real Gov. Expenditure, Bill. of Chained (2011) Yen, Japan, SA
14 GOV EZ 3 Real Gov. Expenditure, Mill. of Chained (2010) Euros, Eurozone, SA
15 GOV CHN 3 Nominal Gov. Expenditure, Bill. of Yuans, China, SA
Prices
16 CPI EEUU 3 Consumer Price Index, (1982-84=100), Unites States, SA
17 CPI JPN 3 Consumer Price Index, (2015=100), Japan, SA
18 CPI EZ 3 Consumer Price Index, (2015=100), Eurozone, SA
19 CPI CHN 3 Consumer Price Index, (2016Q4=100), China, SA
Unemployment
20 UNEMP USA 3 Unemployment, Thousands, United States, SA
21 UNEMP JPN 3 Unemployment, Ten Thousands, Japan, SA
22 UNEMP EZ 3 Unemployment, Thousands, Eurozone, SA
Foreign Trade
23 X USA 3 Real Exports, Bill. of Chained (2009) US Dollars, United States, SA
24 X JPN 3 Real Exports, Bill. of Chained (2011) Yen, Japan, SA
25 X EZ 3 Real Exports, Mill. of Chained (2010) Euros, Eurozone, SA
26 X CHN 3 Nominal Exports, Bill. of Yuans, China, SA
27 M USA 3 Real Imports, Bill. of Chained (2009) US Dollars, United States, SA
28 M JPN 3 Real Imports, Bill. of Chained (2011) Yen, Japan, SA
29 M EZ 3 Real Imports, Mill. of Chained (2010) Euros, Eurozone, SA
30 M CHN 3 Nominal Imports, Bill. of Yuans, China, SA
Monetary Policy Rates
31 MPR USA 0 Monetary Policy Rate, % Per Annum, United States
32 MPR EZ 0 Monetary Policy Rate, % Per Annum, Eurozone
33 MPR CHN 0 Monetary Policy Rate, % Per Annum, China

22
 Table 7: Data description.

Id Mnemonic Transf. Series Description

Real Exchange Rates
34 RER USA 2 Real Exchange Rate (Trade Weighted), (03/1973=100), United States
35 RER JPN 2 Real Exchange Rate (Trade Weighted), (2010=100), Japan
36 RER EU 2 Real Exchange Rate (Trade Weighted), (2010=100), Eurozone
37 RER CHN 2 Real Exchange Rate (Trade Weighted), (2010=100), China
38 IPE 2 External Price Index (Trade Weighted), (1986=100), Chile
39 IPE5 2 External Price Index (5 Major Trade Partners), (1986=100), Chile
Soverign Bond Yields
40 Y10 USA 1 Sovr. Bond Yields 10Yr (Emis. in US Dollars), % Per Annum, United States
41 Y10 JPN 1 Soverign Bond Yields 10Yr (Emission in Yens), % Per Annum, Japan
42 Y10 EZ 1 Soverign Bond Yields 10Yr (Emission in Euros), % Per Annum, Eurozone
Stock Markets
43 S&P500 2 Stock Price Index - S&P500, United States
44 NIKKEI 2 Stock Price Index - Nikkei 225, Japan
45 EUROSTOXX 2 Stock Price Index - EURO STOXX 50, Eurozone
46 SHNGCOMP 2 Stock Price Index - SSE Composite, China
Sectoral Economic Indicators
47 IP USA 3 Industrial Production Index, (2012=100), United States, SA
48 IP JPN 3 Industrial Production Index, (2010=100), Japan, SA
49 IP EZ 3 Industrial Production Index, (2010=100), Eurozone, SA
50 IU CHN 3 Industrial Utilities, Bill. of Yuans, China, SA
51 RS EEUU 3 Retail Sales, Mill. of (2009) US Dollars, United States, SA
52 RS JPN 3 Retail Sales Index, (2015=100), Japan, SA
53 RS EZ 3 Retail Sales Index, (2010=100), Eurozone, SA
54 RS CHN 3 Retail Sales, Bill. of Yuans, China, SA
Commodity Prices
55 CU 3 Generic 1st High Grade Copper Future Contract, US Dollars, CME
56 INV CU 3 Copper Inventory Data, Short Ton, Commodities Exchange Center (Comex)
57 PULP 3 Generic 1st Industrial Wood Pulp Future Contract, US Dollars, CME
58 WTI 3 Generic 1st WTI Crude Oil Future Contract, US Dollars, CME
59 BRENT 3 Generic 1st Brent Crude Oil Future Contract, US Dollars, CME
60 GAS 3 Generic 1st Natural Gas Future Contract, US Dollars, CME
61 FAO FOOD 3 Food Price Index, (2002-2004=100), FAO
Volatility Indexes
62 VIX 2 Vix Volatility Index, Chicago Board Options Exchange (CBOE)
63 TED SPRD 2 3m Libor rate minus 3m T-Bill (generic) rate, basis points, Bloomberg
64 EMBI GLBL 2 Emerging Markets Bond Index Global, US Dollars, J.P.Morgan
DOMESTIC VARIABLES
Gross Domestic Product
1 GDP 3 Real GDP - Total, Mill. of Chained (2008) Pesos, SA
2 GDP EXNR 3 Real GDP - Ex Natural Resources, Mill. of Chained (2008) Pesos, SA
3 GDP AGRI 3 Real GDP - Agriculture, Mill. of Chained (2008) Pesos, SA
4 GDP FISH 3 Real GDP - Fishing, Mill. of Chained (2008) Pesos, SA
5 GDP MIN 3 Real GDP - Mining, Mill. of Chained (2008) Pesos, SA
6 GDP MANF 3 Real GDP - Manufacturing, Mill. of Chained (2008) Pesos, SA
7 GDP UTIL 3 Real GDP - Utilities, Mill. of Chained (2008) Pesos, SA
8 GDP CONS 3 Real GDP - Construction, Mill. of Chained (2008) Pesos, SA
9 GDP RET 3 Real GDP - Retail sales, Mill. of Chained (2008) Pesos, SA
10 GDP TRANS 3 Real GDP - Transport, Mill. of Chained (2008) Pesos, SA
11 GDP COMM 3 Real GDP - Communcations, Mill. of Chained (2008) Pesos, SA
12 GDP FINS 3 Real GDP - Financial Services, Mill. of Chained (2008) Pesos, SA
13 GDP HS 3 Real GDP - Housing, Mill. of Chained (2008) Pesos, SA

23
 Table 7: Data description.

Id Mnemonic Transf. Series Description

14 GDP PERS 3 Real GDP - Personal Services, Mill. of Chained (2008) Pesos, SA
15 GDP PAD 3 Real GDP - Public Administration, Mill. of Chained (2008) Pesos, SA
Sectoral Economic Indicators
16 HIDRO GEN 3 Hydroelectric Generation, GWh, SA
17 EE DISP 3 Electrical Energy Dispatch, GWh, SA
18 GEN SIC 3 Gener. - Central Interconnected System (SIC), GWh, SA
19 GEN SING 3 Gener. - Norte Grande Interconnected System (SING), GWh, SA
20 HS TOT 3 Authorized Area for Building - Total, m2 , SA
21 HS STGO 3 Housing Sales, Santiago Metropolitan Area, Units, SA
22 PI MIN 3 Mining Production Index (2014=100), SA
23 ISUP 3 Supermarket Sales Index (2014=100), SA
24 IV ANAC 3 Auto Sales - Total, Units, SA
25 P SOFOFA 3 Industrial Production Index (2003=100), SA
26 S SOFOFA 3 Industrial Sales Index (2003=100), SA
27 X CU 3 Copper Exports, Thousands of Tonnes of Fine Copper, SA
28 BLD MAT 3 Dispatch of Building Materials Index (2008=100), SA
Expenditure
29 EXP INV 3 Real Investment - Total, Mill. of Chained (2008) Pesos, SA
30 EXP INVI 3 Real Investment - Infrastructure, Mill. of Chained (2008) Pesos, SA
31 EXP INVM 3 Real Investment - Mach.& Equip., Mill. of Chained (2008) Pesos, SA
32 EXP PC 3 Real Private Consumption - Total, Mill. of Chained (2008) Pesos, SA
33 EXP PCD 3 Real Private Consumption - Durable, Mill. of Chained (2008) Pesos, SA
34 EXP PCND 3 Real Private Consumption - Non Durable, Mill. of Chained (2008) Pesos, SA
35 EXP GOV 3 Real Gov. Expenditure, mill. of chained (2008) pesos, SA
36 EXP X 3 Real Exports, Mill. of Chained (2008) Pesos, SA
37 EXP M 3 Real Imports, Mill. of Chained (2008) Pesos, SA
38 EXP STOCK 0 Stock Variations to Real GDP, Rate
Prices
39 CPI 3 Consumer Price Index - Total, (2013=100), SA
40 CPI CORE 3 Consumer Price Index - Core, (2013=100), SA
41 CPI COREG 3 Consumer Price Index - Core ex Services, (2013=100), SA
42 CPI CORES 3 Consumer Price Index - Core ex Goods, (2013=100), SA
43 CPI FOOD 3 Consumer Price Index - Foodstuffs, (2013=100), SA
44 CPI ALCOH 3 Consumer Price Index - Alcoholic Beverages & Tobacco, (2013=100), SA
45 CPI APPRL 3 Consumer Price Index - Apparel, (2013=100), SA
46 CPI COMB 3 Consumer Price Index - House Rentals, Utilities & Fuel, (2013=100), SA
47 CPI HOUSE 3 Consumer Price Index - Housing, (2013=100), SA
48 CPI HLTH 3 Consumer Price Index - Healthcare services, (2013=100), SA
49 CPI TRANS 3 Consumer Price Index - Transportation, (2013=100), SA
50 CPI COMUN 3 Consumer Price Index - Communication, (2013=100), SA
51 CPI CULT 3 Consumer Price Index - Culture, (2013=100), SA
52 CPI EDUC 3 Consumer Price Index - Education, (2013=100), SA
53 CPI REST 3 Consumer Price Index - Restaurants & Hotels, (2013=100), SA
54 CPI OTHER 3 Consumer Price Index - Other, (2013=100), SA
Employment
55 EMP 3 Employment - Total, Thousands, SA
56 EMP AGRIC 3 Employment - Agriculture, Thousands, SA
57 EMP RET 3 Employment - Retail, Thousands, SA
58 EMP CONS 3 Employment - Construction, Thousands, SA
59 EMP UTIL 3 Employment - Utilities, Thousands, SA
60 EMP IND 3 Employment - Industrial, Thousands, SA
61 EMP MIN 3 Employment - Mining, Thousands, SA

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 Table 7: Data description.

Id Mnemonic Transf. Series Description

62 EMP COMS 3 Employment - Community Services, Thousands, SA
63 EMP FINS 3 Employment - Financial Services, Thousands, SA
64 EMP TRANS 3 Employment - Transport, Thousands, SA
Other Labor Market Indicators
65 UNEMP 0 Unemployment Rate - National
66 UNEMP MA 0 Unemployment Rate - Santiago Metropolitan Area
67 WFORCE 3 Work Force, Thousands
68 WHOURS 3 Effective Worked Hours, Hrs per Week
69 VACANTS 2 Job Vacancies Index, (1995=100), SA
Wages
70 WGS 3 Real Wages - Total, (2013=100), SA
71 WGS MIN 3 Real Wages - Mining, (2013=100), SA
72 WGS IND 3 Real Wages - Industrial, (2013=100), SA
73 WGS UT 3 Real Wages - Utilities, (2013=100), SA
74 WGS CONS 3 Real Wages - Construction, (2013=100), SA
75 WGS RET 3 Real Wages - Retail, (2013=100), SA
76 WGS TR 3 Real Wages - Transport, (2013=100), SA
77 WGS FINS 3 Real Wages - Financial Services, (2013=100), SA
78 WGS COMM 3 Real Wages - Community Services, (2013=100), SA
Credit
79 LOANS 3 Nominal Loans - Total, Billions of Pesos, SA
80 C LOANS 3 Nominal Loans - Consumption, Billions of Pesos, SA
81 EXT LOANS 3 Nominal Loans - Foreign Trade, Billions of Pesos, SA
82 MRG LOANS 3 Nominal Loans - Mortgages, Billions of Pesos, SA
83 CRP LOANS 3 Nominal Loans - Corporate, Billions of Pesos, SA
Monetary Aggregates
84 MON M0 3 Monetary Aggregates - M0, Billions of Pesos, SA
85 MON M1 3 Monetary Aggregates - M1, Billions of Pesos, SA
Interest Rates
86 MPR 0 Monetary Policy Rate, % Per Annum
87 DEPN 90D 1 Average Nominal Deposit Rate, 90 Days, % Per Annum
88 DEPN 1A 1 Average Nominal Deposit Rate, 1 Year, % Per Annum
89 DEPN 3A 1 Average Nominal Deposit Rate, 3 Years, % Per Annum
90 DEPR 90D 1 Average Real Deposit Rate, 90 Days, % Per Annum
91 DEPR 1A 1 Average Real Deposit Rate, 1 Year, % Per Annum
92 DEPR 3A 1 Average Real Deposit Rate, 3 Years, % Per Annum
93 LOANN 90D 1 Average Nominal Loan Rate, 90 Days, % Per Annum
94 LOANN 1A 1 Average Nominal Loan Rate, 1 Year, % Per Annum
95 LOANN 3A 1 Average Nominal Loan Rate, 3 Years, % Per Annum
96 LOANR 90D 1 Average Real Loan Rate, 90 Days, % Per Annum
97 LOANR 1A 1 Average Real Loan Rate, 1 Year, % Per Annum
98 LOANR 3A 1 Average Real Loan Rate, 3 Years, % Per Annum
Stock Market
99 IPSA 2 Stock Price Index - IPSA
100 IGPA 2 Stock Price Index - IGPA
101 INTER10 2 Stock Price Index - INTER10
Exchange Rates
102 RER 2 Real Exchange Rate - Multilateral (Trade Weighted), (1986=100)
103 RER5 2 Real Exchange Rate - 5 Major Trade Part. (Trade Weighted), (1986=100)
104 FX 3 Nominal Exchange Rate, United States Dollars
105 FXM 3 Nominal Exchange Rate, Multilateral (Trade Weighted), (1/2/1998=100)
Surveys

25
 Table 7: Data description.

Id Mnemonic Transf. Series Description

106 UCH TDAY 2 UChile Survey - Consumer Confidence, (2001Q1=100), SA
107 UCH 12M 2 UChile Survey - Expected Situation in 12 months, (2001Q1=100), SA
108 UCH 1YRA 2 UChile Survey - Current Situation - Personal, (2001Q1=100), SA
109 UCH FAM 2 UChile Survey - Current Situation - Family, (2001Q1=100), SA
110 UCH NAT 2 UChile Survey - Current Situation - Country, (2001Q1=100), SA
111 EEE GDP 0 CBCh Economic Expect. Survey - GDP growth for current quarter, SA
112 EEE CPI 0 CBCh Economic Expect. Survey - CPI inflation (annual) in 12 months, SA
113 EEE MPR 0 CBCh Economic Expect. Survey - MPR in 12 months, % Per Annum, SA
114 EEE FX 0 CBCh Economic Expect. Survey - RER in 12 months, SA

26