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Barnett, William A.
Chauvet, Marcelle
Leiva-Leon, Danilo
Year of Publication: 
Series/Report no.: 
Bank of Canada Working Paper 2014-39
This paper provides a framework for the early assessment of current U.S. nominal GDP growth, which has been considered a potential new monetary policy target. The nowcasts are computed using the exact amount of information that policy-makers have available at the time predictions are made. However, real-time information arrives at different frequencies and asynchronously, which poses challenges of mixed frequencies, missing data and ragged edges. This paper proposes a multivariate state-space model that not only takes into account asynchronous information inflow, but also allows for potential parameter instability. We use small-scale confirmatory factor analysis in which the candidate variables are selected based on their ability to forecast nominal GDP. The model is fully estimated in one step using a non-linear Kalman filter, which is applied to obtain optimal inferences simultaneously on both the dynamic factor and parameters. In contrast to principal component analysis, the proposed factor model captures the comovement rather than the variance underlying the variables. We compare the predictive ability of the model with other univariate and multivariate specifications. The results indicate that the proposed model containing information on real economic activity, inflation, interest rates and Divisia monetary aggregates produces the most accurate realtime nowcasts of nominal GDP growth.
Business fluctuations and cycles
Econometric and statistical methods
Inflation and prices
Document Type: 
Working Paper
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