Factor nowcasting of German GDP with ragged-edge data : A model comparison using MIDAS projections

This paper compares di¤erent ways to estimate the current state of the economy using factor models that can handle unbalanced datasets. Due to the di¤erent release lags of business cycle indicators, data unbalancedness often emerges at the end of multivariate samples, which is sometimes referred to as the ‘ragged edge’ of the data. Using a large monthly dataset of the German economy, we compare the performance of di¤erent factor models in the presence of the ragged edge: static and dynamic principal components based on realigned data, the ExpectationMaximisation (EM) algorithm and the Kalman smoother in a state-space model context. The monthly factors are then used to estimate current quarter GDP, called the ‘nowcast’, using di¤erent versions of what we call factor-based mixed-data sampling (FACTOR-MIDAS) approaches. We compare all possible combinations of factor estimation methods and FACTOR-MIDAS projections with respect to nowcast performance. Additionally, we discuss the relevance of the missing observations at the end of the sample by comparing forecasts based on ragged-edge data with forecasts based on arti…cially balanced datasets. Finally, we compare the two-step FACTOR-MIDAS approach to nowcasts with a fully integrated state-space model. JEL Classi…cation Codes: E37, C53

[1]  J. Stock,et al.  A Comparison of Direct and Iterated Multistep Ar Methods for Forecasting Macroeconomic Time Series , 2005 .

[2]  Serena Ng,et al.  Determining the Number of Primitive Shocks in Factor Models , 2007 .

[3]  Marco Lippi,et al.  The Generalized Dynamic Factor Model , 2002 .

[4]  Sandra Eickmeier,et al.  How Successful are Dynamic Factor Models at Forecasting Output and Inflation? A Meta-Analytic Approach , 2008 .

[5]  George Kapetanios,et al.  A parametric estimation method for dynamic factor models of large dimensions , 2006 .

[6]  Serena Ng,et al.  Understanding and Comparing Factor-Based Forecasts , 2005 .

[7]  J. Stock,et al.  Macroeconomic Forecasting Using Diffusion Indexes , 2002 .

[8]  Ard den Reijer,et al.  Forecasting Dutch GDP using Large Scale Factor Models , 2005 .

[9]  Massimiliano Marcellino,et al.  Interpolation and Backdating with a Large Information Set , 2003, SSRN Electronic Journal.

[10]  Michael P. Clements,et al.  Macroeconomic Forecasting With Mixed-Frequency Data , 2008 .

[11]  Filippo Altissimo,et al.  New Eurocoin: Tracking Economic Growth in Real Time , 2006, The Review of Economics and Statistics.

[12]  Kenneth F. Wallis,et al.  Forecasting with an econometric model: The ‘ragged edge’ problem† , 1986 .

[13]  J. Bai,et al.  Determining the Number of Factors in Approximate Factor Models , 2000 .

[14]  David F. Hendry,et al.  Non-Parametric Direct Multi-Step Estimation for Forecasting Economic Processes , 2004 .

[15]  Jean Boivin,et al.  Monetary Policy in a Data-Rich Environment , 2001 .

[16]  Martin Schneider,et al.  Forecasting Austrian GDP using the generalized dynamic factor model , 2004 .

[17]  Domenico Giannone,et al.  Nowcasting GDP and Inflation: The Real Time Informational Content of Macroeconomic Data Releases , 2005 .

[18]  C. De Mol,et al.  Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components? , 2006, SSRN Electronic Journal.

[19]  E. Ghysels,et al.  MIDAS Regressions: Further Results and New Directions , 2006 .

[20]  R. Mariano,et al.  A New Coincident Index of Business Cycles Based on Monthly and Quarterly Series , 2002 .

[21]  Anindya Banerjee,et al.  Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change , 2008 .

[22]  George Kapetanios,et al.  Forecast Combination and the Bank of England's Suite of Statistical Forecasting Models , 2007 .

[23]  Anindya Banerjee,et al.  Are There Any Reliable Leading Indicators for U.S. Inflation and GDP Growth? , 2003 .

[24]  Laurent Ferrara,et al.  Point and interval nowcasts of the Euro area IPI , 2007 .

[25]  Christian Schumacher,et al.  Forecasting German GDP Using Alternative Factor Models Based on Large Datasets , 2007, SSRN Electronic Journal.

[26]  J. Stock,et al.  Forecasting with Many Predictors , 2006 .

[27]  Jörg Breitung,et al.  Real-Time Forecasting of GDP Based on a Large Factor Model with Monthly and Quarterly Data , 2007, SSRN Electronic Journal.

[28]  Domenico Giannone,et al.  Comparing Alternative Predictors Based on Large‐Panel Factor Models , 2006 .

[29]  Anindya Banerjee,et al.  Leading Indicators for Euro-Area Inflation and GDP Growth , 2003 .