Forecasting GDP with Global Components. This Time is Different

36 Pages Posted: 11 May 2016

See all articles by Hilde C. Bjørnland

Hilde C. Bjørnland

Norwegian School of Management (BI); Norges Bank

Francesco Ravazzolo

Free University of Bozen-Bolzano - Faculty of Economics and Management; BI Norwegian Business School

Leif Anders Thorsrud

Norges Bank; BI Norwegian Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2015

Abstract

We examine whether knowledge of in-sample co-movement across countries can be 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 adds marginal predictive power compared to a domestic alternative? To answer this question we use 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 forecast accuracy in terms of both point and density forecast evaluation across a large panel of countries. We also document that the Great Recession has a huge impact on this result, causing a clear preference shift towards the model including a common global factor. 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.

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 (December 30, 2015). CAMA Working Paper No. 24/2016 . Available at SSRN: https://ssrn.com/abstract=2777828 or http://dx.doi.org/10.2139/ssrn.2777828

Hilde C. Bjørnland (Contact Author)

Norwegian School of Management (BI) ( email )

P.O. Box 580
N-1302 Sandvika
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Francesco Ravazzolo

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: http://www.francescoravazzolo.com/

Leif Anders Thorsrud

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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