Real-Time Forecasting US GDP from Small-Scale Factor Models
27 Pages Posted: 11 Oct 2014
Date Written: October 10, 2014
We show that the single-index dynamic factor model developed by Aruoba and Diebold (Am Econ Rev, 100:20-24, 2010) to construct an index of US business cycle conditions is also very useful for forecasting US GDP growth in real time. In addition, we adapt the model to include survey data and financial indicators. We find that our extension is unequivocally the preferred alternative for computing backcasts. In nowcasting and forecasting, our model is able to forecast growth as well as AD and better than several baseline alternatives. Finally, we show that our extension could also be used to infer US business cycles with great accuracy.
Keywords: real-time forecasting, economic indicators, business cycles
JEL Classification: E32, C22, E27
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