Nowcasting Business Cycles: A Bayesian Approach to Dynamic Heterogeneous Factor Models

FEDS Working Paper No. 2015-066

http://dx.doi.org/10.17016/FEDS.2015.066

25 Pages Posted: 26 Aug 2015

See all articles by Antonello D'Agostino

Antonello D'Agostino

European Stability Mechanism; Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Michele Lenza

European Central Bank (ECB)

Michele Modugno

Board of Governors of the Federal Reserve System

Date Written: August 12, 2015

Abstract

We develop a framework for measuring and monitoring business cycles in real time. Following a long tradition in macroeconometrics, inference is based on a variety of indicators of economic activity, treated as imperfect measures of an underlying index of business cycle conditions. We extend existing approaches by permitting for heterogenous lead-lag patterns of the various indicators along the business cycles. The framework is well suited for high-frequency monitoring of current economic conditions in real time - nowcasting - since inference can be conducted in presence of mixed frequency data and irregular patterns of data availability. Our assessment of the underlying index of business cycle conditions is accurate and more timely than popular alternatives, including the Chicago Fed National Activity Index (CFNAI). A formal real-time forecasting evaluation shows that the framework produces well-calibrated probability nowcasts that resemble the consensus assessment of the Survey of Professional Forecasters.

Keywords: Business Cycles, Current Economic Conditions, Dynamic Factor Models, Dynamic Heterogeneity, Nowcasting, Real Time

JEL Classification: C11, C32, C38, E32

Suggested Citation

D'Agostino, Antonello and Giannone, Domenico and Lenza, Michele and Modugno, Michele, Nowcasting Business Cycles: A Bayesian Approach to Dynamic Heterogeneous Factor Models (August 12, 2015). http://dx.doi.org/10.17016/FEDS.2015.066. Available at SSRN: https://ssrn.com/abstract=2650689 or http://dx.doi.org/10.2139/ssrn.2650689

Antonello D'Agostino

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michele Lenza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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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