A Monthly Indicator of Brazilian GDP
UCR Department of Economics Working Paper
32 Pages Posted: 23 Jan 2001
Date Written: September 2000
This paper constructs an indicator of Brazilian GDP at the monthly frequency. The peculiar instability and abrupt changes of regimes in the dynamic behavior of the Brazilian business cycle were explicitly modeled within nonlinear frameworks. In particular, a Markov switching dynamic factor model was used to combine several macroeconomic variables that display simultaneous comovements with aggregate economic activity. The model generates as output a monthly indicator of the Brazilian GDP and real time probabilities of the current phase of the Brazilian business cycle. The monthly indicator shows a remarkable historical conformity with cyclical movements of GDP. In addition, the estimated filtered probabilities predict all recessions in sample and out-of-sample. The ability of the indicator in linear forecasting growth rates of GDP is also examined. The estimated indicator displays a better in-sample and out-of-sample predictive performance in forecasting growth rates of real GDP, compared to a linear autoregressive model for GDP. These results suggest that the estimated monthly indicator can be used to forecast GDP and to monitor the state of the Brazilian economy in real time.
Keywords: Business Cycle, Dynamic Factor, Markov Switching, Composite Indicators, Kalman filter, Filtered Probabilities, Forecast.
JEL Classification: C32, C50, E32
Suggested Citation: Suggested Citation