Nowcasting Monthly GDP with Big Data: a Model Averaging Approach
Proietti Tommaso Giovannelli Alessandro
CEIS Research Paper
Gross domestic product (GDP) is the most comprehensive and authoritative measure of economic activity. The macroeconomic literature has focused on nowcasting and forecasting this measure at the monthly frequency, using related high frequency indicators. We address the issue of estimating monthly gross domestic product using a large dimensional set of monthly indicators, by pooling the disaggregate estimates arising from simple and feasible bivariate models that consider one indicator at a time in conjunction to GDP. Our base model handles mixed frequency data and ragged-edge data structure with any pattern of missingness. Our methodology enables to distill the common component of the available economic indicators, so that the monthly GDP estimates arise from the projection of the quarterly figures on the space spanned by the common component. The weights used for the combination reflect the ability to nowcast quarterly GDP and are obtained as a function of the regularized estimator of the high-dimensional covariance matrix of the nowcasting errors. A recursive nowcasting and forecasting experiment illustrates that the optimal weights adapt to the information set available in real time and vary according to the phase of the business cycle.
Keywords: Mixed-Frequency Data, Dynamic Factor Models, State Space Models,Shrinkage
JEL codes: C32, C52, C53, E37
Date: Tuesday, May 12, 2020
Revision Date: Tuesday, May 12, 2020