A short - Term Now - Casting model for Kenyan's Quarterly GDP - the dynamic factor model approach

Abstract

This research study, A Short-Term Now-Casting Model for Kenyan's Quarterly GDP: The Dynamic Factor Model Approach, was carried out with the need to: establish a set of common factors explaining variations in macroeconomic variables, determine the optimal number of factors for now casting and to evaluate the performance of the dynamic factor model in now – casting Kenya's quarterly GDP. Principal component analysis was used to extract the common factors and an information criteria, among other methods, used to determine the optimal number of common factors. The common factors were then regressed against the in sample quarterly GDP figures to obtain the full specification of the dynamic factor model equation. The extraction of the common factors allowed for an out of sample now - casting exercise, from which, the study concluded that the dynamic factor model performs adequately well relative to historical GDP figures. Consequently, the model would be well useful in making timely estimates of end of quarter GDP. The scope of this research can be extend to analyze the implication of data revisions on the now - casts.