Nowcasting India's Quarterly GDP Growth: A Factor Augmented Time-Varying Coefficient Regression Model (FA-TVCRM)

Rudrani Bhattacharya (), Bornali Bhandari and Sudipto Mundle
Additional contact information
Rudrani Bhattacharya: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: Governments, central banks, private firms and others need high frequency information on the state of the economy for their decision making. However, a key indicator like GDP is only available quarterly and that too with a lag. Hence decision makers use high frequency daily, weekly or monthly information to project GDP growth in a given quarter. This method, known as nowcasting, which started out in advanced country central banks using bridge models. Nowcasting is now based on more advanced techniques, mostly dynamic factor models. In this paper we use a novel approach, a Factor Augmented Time Varying Coefficient Regression (FA-TVCR) model, which allows us to extract information from a large number of high frequency indicators and at the same time inherently addresses the issue of frequent structural breaks encountered in Indian GDP growth. One specification of the FA-TVCR model is estimated using 19 variables available for a long period starting in 2007-08:Q1. Another specification estimates the model using a larger set of 28 indicators available for a shorter period starting in 2015-16:Q1. Comparing our model with two alternative models, we find that the FA-TVCR model outperforms a DFM model in terms of both in-sample and out-of-sample RMSE. The RMSE of the ARIMA model is somewhat lower than the FA-TVCR model within the sample period but is higher than the out-of-sample of the FA-TVCR model. Further, comparing the predictive power of the three models using the Diebold-Mariano test, we find that FA-TVCR model out-performs DFM consistently. In terms of out-of-sample forecast accuracy both the FA-TVC model and the ARIMA model have the same predictive accuracy under normal conditions. However, the FA-TVCR model outperforms the ARIMA model when applied for nowcasting in periods of major shocks like the Covid-19 shock of 2020-21.

Keywords: Nowcasting; Quarterly Year-on-Year GDP growth; State-Space Model, India (search for similar items in EconPapers)
JEL-codes: C52 C53 O40 (search for similar items in EconPapers)
Pages: 19
Date: 2021-10
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-for and nep-mac
Note: Working Paper 357, 2021
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.nipfp.org.in/media/medialibrary/2021/10/WP_357_2021.pdf (application/pdf)

Related works:
Working Paper: Nowcasting India's Quarterly GDP Growth: A Factor Augmented Time-Varying Coefficient Regression Model (FA-TVCRM) (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:npf:wpaper:21/357

Access Statistics for this paper

More papers in Working Papers from National Institute of Public Finance and Policy
Bibliographic data for series maintained by S.Siva Chidambaram ( this e-mail address is bad, please contact ).