Macroeconomic now- and forecasting based on the factor error correction model using targeted mixed frequency indicators

Jeong-Ryeol Kurz-Kim

No 47/2016, Discussion Papers from Deutsche Bundesbank

Abstract: Since the influential paper of Stock and Watson (2002), the dynamic factor model (DFM) has been widely used for forecasting macroeconomic key variables such as GDP. However, the DFM has some weaknesses. For nowcasting, the dynamic factor model is modified by using the mixed data sampling technique. Other improvements are also studied mostly in two directions: a pre-selection is used to optimally choose a small number of indicators from a large number of indicators. The error correction mechanism takes into account the co-integrating relationship between the key variables and factors and, hence, captures the long-run dynamics of the non-stationary macroeconomic variables. This papers proposes the factor error correction model using targeted mixedfrequency indicators, which combines the three refinements for the dynamic factor model, namely the mixed data sampling technique, pre-selection methods, and the error correction mechanism. The empirical results based on euro-area data show that the now- and forecasting performance of our new model is superior to that of the subset models.

Keywords: Factor model; MIDAS; Lasso; Elastic Net; ECM; Nowcasting; Forecasting (search for similar items in EconPapers)
JEL-codes: C18 C23 C51 C52 C53 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:472016

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