Advances in Nowcasting Economic Activity: Secular Trends, Large Shocks and New Data

47 Pages Posted: 12 Aug 2020

See all articles by Juan Antolin-Diaz

Juan Antolin-Diaz

London Business School - Department of Economics

Thomas Drechsel

London School of Economics & Political Science (LSE)

Ivan Petrella

University of Warwick; Centre for Economic Policy Research (CEPR)

Date Written: August 8, 2020

Abstract

The assessment of macroeconomic conditions in real time is challenging. Dynamic factor models, which summarize the comovement across many macroeconomic time series as driven by a small number of shocks, have become the workhorse tool for ‘nowcasting’ activity. This paper develops a novel dynamic factor model that explicitly captures three salient features of modern business cycles: low frequency movements in long-run growth and volatility, lead-lag patterns in the responses of variables to common shocks, and fat-tailed outliers. We use real-time unrevised data for the last two decades and cloud computing technology to conduct an out-of-sample evaluation exercise of the model. The exercise demonstrates the importance of considering these features for forecasting and probability assessment of economic conditions. In an application to the COVID-19 recession, we develop a method to incorporate newly available high-frequency data. The use of such alternative data is essential to track the downturn in activity, but a careful econometric specification is just as important.

Keywords: Nowcasting, Dynamic Factor Models, Real-Time Data, Bayesian Methods, Fat Tails

JEL Classification: E32, E23, O47, C32, E01

Suggested Citation

Antolin-Diaz, Juan and Drechsel, Thomas and Petrella, Ivan, Advances in Nowcasting Economic Activity: Secular Trends, Large Shocks and New Data (August 8, 2020). Available at SSRN: https://ssrn.com/abstract=3669854 or http://dx.doi.org/10.2139/ssrn.3669854

Juan Antolin-Diaz (Contact Author)

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Thomas Drechsel

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Ivan Petrella

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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