The Importance of Updating: Evidence from a Brazilian Nowcasting Model

24 Pages Posted: 25 Nov 2014

See all articles by Daniela Bragoli

Daniela Bragoli

Università Cattolica del Sacro Cuore

Luca Metelli

Bank of Italy

Michele Modugno

Board of Governors of the Federal Reserve System

Date Written: November 1, 2014

Abstract

How often should we update predictions for economic activity? Gross domestic product is a quarterly variable disseminated usually a couple of months after the end of the quarter, but many other macroeconomic indicators are released with a higher frequency, and financial markets react very strongly to them. However, most of the professional forecasters, including the IMF, the OECD, and most central banks, tend to update their forecasts of economic activity only two to four times a year. The main exception is the Central Bank of Brazil which is responsible for collecting and publishing a daily survey on GDP and other variables.

The aim of this article is to evaluate the forecasting performance of the Central Bank of Brazil Survey and to compare it with the mechanical forecasts based on state-of-the-art nowcasting techniques. Results indicate that institutional forecasts perform as well as model-based forecasts. The latter finding suggests that, on the one hand, judgmental forecasters do not have computational limitations and are able to incorporate very quickly new information in a way that is as efficient as a machine. On the other hand, it confirms what has been found in other studies, namely that a linear time invariant model does a good job and hence that eventual nonlinearities, time variations and soft information (such as weather conditions or government decisions) that could be incorporated by judgment, do not provide new important information.

Keywords: Nowcasting, updating, dynamic factor model

JEL Classification: C33, C53, E37

Suggested Citation

Bragoli, Daniela and Metelli, Luca and Modugno, Michele, The Importance of Updating: Evidence from a Brazilian Nowcasting Model (November 1, 2014). FEDS Working Paper No. 2014-94, Available at SSRN: https://ssrn.com/abstract=2529168 or http://dx.doi.org/10.2139/ssrn.2529168

Daniela Bragoli

Università Cattolica del Sacro Cuore ( email )

via Necchi 9
Milan
Italy

Luca Metelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Michele Modugno (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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