The Role of Indicator Selection in Nowcasting Euro Area GDP in Pseudo Real Time
Quaderni - Working Paper DSE N° 919
59 Pages Posted: 15 Jan 2014
Date Written: January 13, 2014
Building on the literature on regularization and dimension reduction methods, we have developed a quarterly forecasting model for euro area GDP. This method consists in bridging quarterly national accounts data using factors extracted from a large panel of monthly and quarterly series including business surveys and financial indicators. The pseudo real-time nature of the information set is accounted for as the pattern of publication lags is considered. Forecast evaluation exercises show that predictions obtained through various dimension reduction methods outperform both the benchmark AR and the diffusion index model without pre-selected indicators. Moreover, forecast combination significantly reduces forecast error.
Keywords: Euro Area GDP forecasts, Bridge and Factor Models, Indicators' selection and pre-screening, Forecasting ability
JEL Classification: C53, C22, E37, F47
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