Nowcasting ‘True’ Monthly US GDP During the Pandemic
37 Pages Posted: 27 Jan 2021
Date Written: January 27, 2021
Expenditure side and income side GDP are both measured at the quarterly frequency in the US and contain measurement error. They are noisy proxies of `true’ GDP. Several econometric methods exist for producing estimates of true GDP which reconcile these noisy estimates. Recently, the authors of this paper developed a mixed frequency reconciliation model which produces monthly estimates of true GDP. In the present paper, we investigate whether this model continues to work well in the face of the extreme observations that occurred during the pandemic year of 2020 and consider several extensions of it. These extensions include stochastic volatility and error distributions that are fat tailed or explicitly allow for outliers. We also investigate the performance of conditional forecasting, where we estimate our models using data through 2019 and then use these to nowcast throughout 2020. Nowcasts are updated each month of 2020 conditionally on the new data releases which occur each month, but the parameters are not re-estimated. In total we compare the real-time performance of 12 nowcasting approaches over the pandemic months. We find that our original model with Normal homoskedastic errors produces point nowcasts as good or better than any of the other approaches. A property of Normal homoskedastic models that is often considered bad (i.e. that they are not robust to outliers), actually benefits the KMMP model as it reacts confidently to the rapidly evolving economic data. In terms of nowcast densities, we find many of the extensions lead to larger predictive variances reflecting the great uncertainty of the pandemic months.
Keywords: Pandemic, Nowcasting, Income, Expenditure, Mixed frequency model, Vector Autoregression, Bayesian
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