Using Stochastic Hierarchical Aggregation Constraints to Nowcast Regional Economic Aggregates

66 Pages Posted: 7 Mar 2022

See all articles by Gary Koop

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Stuart G. McIntyre

University of Strathclyde

James Mitchell

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis

Date Written: March 3, 2022

Abstract

Recent decades have seen advances in using econometric methods to produce more timely and higher-frequency estimates of economic activity at the national level, enabling better tracking of the economy in real time. These advances have not generally been replicated at the sub–national level, likely because of the empirical challenges that nowcasting at a regional level presents, notably, the short time series of available data, changes in data frequency over time, and the hierarchical structure of the data. This paper develops a mixed– frequency Bayesian VAR model to address common features of the regional nowcasting context, using an application to regional productivity in the UK. We evaluate the contribution that different features of our model provide to the accuracy of point and density nowcasts, in particular the role of hierarchical aggregation constraints. We show that these aggregation constraints, imposed in stochastic form, play a key role in delivering improved regional nowcasts; they prove to be more important than adding region-specific predictors when the equivalent national data are known, but not when this aggregate is unknown.

Keywords: Regional data, Mixed frequency, Nowcasting, Bayesian methods, Real-time data, Vector autoregressions

JEL Classification: C32, C53, E37

Suggested Citation

Koop, Gary and McIntyre, Stuart G. and Mitchell, James and Poon, Aubrey, Using Stochastic Hierarchical Aggregation Constraints to Nowcast Regional Economic Aggregates (March 3, 2022). FRB of Cleveland Working Paper No. 22-06, Available at SSRN: https://ssrn.com/abstract=4049193 or http://dx.doi.org/10.2139/ssrn.4049193

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Stuart G. McIntyre

University of Strathclyde

16 Richmond Street
Glasgow 1XQ, G1 1XQ
United Kingdom

James Mitchell (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://https://www.clevelandfed.org/en/our-research/economists/james-mitchell.aspx

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis ( email )

16 Richmond Street
Glasgow 1XQ, Scotland
United Kingdom

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