Real-Time Nowcasting of Nominal GDP Under Structural Breaks

34 Pages Posted: 18 Nov 2015

See all articles by William A. Barnett

William A. Barnett

University of Kansas - Department of Economics

Marcelle Chauvet

University of California Riverside; University of California Riverside

Danilo Leiva-Leon

Central Bank of Chile

Date Written: September 1, 2014

Abstract

This paper provides a framework for the early assessment of current U.S. nominal GDP growth, which has been considered a potential new monetary policy target. The nowcasts are computed using the exact amount of information that policy-makers have available at the time predictions are made. However, real-time information arrives at different frequencies and asynchronously, which poses challenges of mixed frequencies, missing data and ragged edges. This paper proposes a multivariate state-space model that not only takes into account asynchronous information inflow, but also allows for potential parameter instability. We use small-scale confirmatory factor analysis in which the candidate variables are selected based on their ability to forecast nominal GDP. The model is fully estimated in one step using a non-linear Kalman filter, which is applied to obtain optimal inferences simultaneously on both the dynamic factor and parameters. In contrast to principal component analysis, the proposed factor model captures the comovement rather than the variance underlying the variables. We compare the predictive ability of the model with other univariate and multivariate specifications. The results indicate that the proposed model containing information on real economic activity, inflation, interest rates and Divisia monetary aggregates produces the most accurate realtime nowcasts of nominal GDP growth.

JEL Classification: C32, E27, E31, E32

Suggested Citation

Barnett, William A. and Chauvet, Marcelle and Leiva-Leon, Danilo, Real-Time Nowcasting of Nominal GDP Under Structural Breaks (September 1, 2014). Available at SSRN: https://ssrn.com/abstract=2691693 or http://dx.doi.org/10.2139/ssrn.2691693

William A. Barnett

University of Kansas - Department of Economics ( email )

213A Summerfield
Lawrence, KS 66049
United States
785-864-2844 (Phone)

Marcelle Chauvet

University of California Riverside ( email )

Department of Economics
4136 Sproul Hall
Riverside, CA 92527
United States
(951) 827-1587 (Phone)

HOME PAGE: http://sites.google.com/site/marcellechauvet/

University of California Riverside ( email )

Department of Economics
Riverside, CA 92527
United States

HOME PAGE: http://sites.google.com/site/marcellechauvet/

Danilo Leiva-Leon (Contact Author)

Central Bank of Chile ( email )

Research Department
Huerfanos 1185
Santiago
Chile

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
576
PlumX Metrics