Forecasting GDP with Global Components. This Time is Different

41 Pages Posted: 4 May 2015

See all articles by Hilde C. Bjørnland

Hilde C. Bjørnland

Norwegian School of Management (BI); Norges Bank

Francesco Ravazzolo

Free University of Bolzano

Leif Anders Thorsrud

Norges Bank; BI Norwegian Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2015


A long strand of literature has shown that the world has become more global. Yet, the recent Great Global Recession turned out to be hard to predict, with forecasters across the world committing large forecast errors. We examine whether knowledge of in-sample co-movement across countries could have been used in a more systematic way to improve forecast accuracy at the national level. In particular, we ask if a model with common international business cycle factors forecasts better than the purely domestic alternative? To answer this question we employ a Dynamic Factor Model (DFM) and run an out-of-sample forecasting experiment. Our results show that exploiting the informational content in a common global business cycle factor improves forecasting accuracy in terms of both point and density forecast evaluation across a large panel of countries. In line with much reported in-sample evidence, we also document that the Great Recession has a huge impact on this result. The event causes a clear preference shift towards the model including a common global factor. Similar shifts are not observed earlier in the evaluation sample. However, this time is different also in other respects. On longer forecasting horizons the performance of the DFM deteriorates substantially in the aftermath of the Great Recession. This indicates that the recession shock itself was felt globally, but that the recovery phase has been very different across countries.

Keywords: Bayesian Dynamic Factor Model (BDFM), forecasting, model uncertainty and global factors

JEL Classification: C11, C53, C55, F17

Suggested Citation

Bjørnland, Hilde C. and Ravazzolo, Francesco and Thorsrud, Leif Anders, Forecasting GDP with Global Components. This Time is Different (March 9, 2015). Norges Bank Working Paper 5 | 2015. Available at SSRN: or

Hilde C. Bjørnland (Contact Author)

Norwegian School of Management (BI) ( email )

P.O. Box 580
N-1302 Sandvika

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107

Francesco Ravazzolo

Free University of Bolzano ( email )


Leif Anders Thorsrud

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442

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