Bayesian monthly index for building activity based on mixed frequencies: the case of Chile

Byron Idrovo and Javier E. Contreras-Reyes

Journal of Economic Studies, 2021, vol. 49, issue 3, 541-557

Abstract: Purpose - This paper combines the objective information of six mixed-frequency partial-activity indicators with assumptions or beliefs (called priors) regarding the distribution of the parameters that approximate the state of the construction activity cycle. Thus, this paper uses Bayesian inference with Gibbs simulations and the Kalman filter to estimate the parameters of the state-space model, used to design the Imacon. Design/methodology/approach - Unlike other economic sectors of similar importance in aggregate gross domestic product, such as mining and industry, the construction sector lacked a short-term measure that helps to identify its most recent performance. Findings - Indeed, because these priors are susceptible to changes, they provide flexibility to the original Imacon model, allowing for the assessment of risk scenarios and adaption to the greater relative volatility that characterizes the sector's activity. Originality/value - The classic maximum likelihood method of estimating the monthly construction activity index (Imacon) is rigid to the incorporation of new measures of uncertainty, expectations or different volatility (risks) levels in the state of construction activity. In this context, this paper uses Bayesian inference with 10,000 Gibbs simulations and the Kalman filter to estimate the parameters of the state-space model, used to design the Imacon, inspired by the original works of Mariano and Murasawa (2003) and Kim and Nelson (1998). Thus, this paper consists of a natural extension of the classic method used by Tejada (2006) in the estimation of the old Imacon.

Keywords: State-space model; Kalman filter; Bayesian inference; Gibbs sampling; Underlying activity; Construction sector (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-01-2021-0022

DOI: 10.1108/JES-01-2021-0022

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