Advances in Nowcasting Economic Activity: The Role of Heterogeneous Dynamics and Fat Tails

Juan Antolin-Diaz, Thomas Drechsel and Ivan Petrella

No 17800, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A key question for households, firms, and policy makers is: how is the economy doing now? This paper develops a Bayesian dynamic factor model that allows for nonlinearities, heterogeneous lead-lag patterns and fat tails in macroeconomic data. Explicitly modeling these features changes the way that different indicators contribute to the real-time assessment of the state of the economy, and substantially improves the out-of-sample performance of this class of models. In a formal evaluation, our nowcasting framework beats benchmark econometric models and professional forecasters at predicting US GDP growth in real time.

Keywords: Nowcasting; Dynamic factor models; Real-time data (search for similar items in EconPapers)
JEL-codes: C32 E01 E23 E32 O47 (search for similar items in EconPapers)
Date: 2023-01
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Journal Article: Advances in nowcasting economic activity: The role of heterogeneous dynamics and fat tails (2024)
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