Abstract
This paper estimates a dynamic factor model (DFM) for nowcasting Canadian gross domestic product. The model is estimated with a mix of soft and hard indicators, and it features a high share of international data. The model is then used to generate nowcasts, predictions of the recent past and current state of the economy. In a pseudo-real-time setting, we show that the DFM outperforms univariate benchmarks, as well as other commonly used nowcasting models, such as MIDAS and bridge regressions.
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Notes
Canadian monthly real GDP is compiled on a by-industry basis and industrial production is an aggregation of mining, quarrying and oil and gas extraction, utilities, manufacturing, and waste management services.
Taxes and subsidies such as sales taxes, fuel taxes, duties, and taxes on imports excise taxes on tobacco and alcohol products and subsidies paid on agricultural commodities, transportation services, and energy.
See Martin (2004) for a detailed exposition of the Bank of Canada Business Outlook Survey.
Lahiri and Monokroussos (2013) show US PMI is a useful leading indicator for economic activity.
Specifically, the importance of US variables for forecasting and nowcasting.
This result is shared with Bragoli and Modugno (2016), who also find that US variables lead to the highest improvements in accuracy earlier in the nowcasting quarter.
We also combine the models with inverse MSE weights. These results are shown in an online appendix and are very similar to the equal weights.
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The authors are extremely thankful for Haeyeon Lee for excellent research assistance. We would also like to thank seminar participants at the Bank of Canada, the 2016 Canadian Economic Association meeting, as well as comments from Andre Binette, Tatjana Dahlhaus, Domenico Giannone, Daniel de Munnik, and two anonymous referees. The views expressed in this paper are solely those of the authors. No responsibility for them should be attributed to the Bank of Canada.
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Chernis, T., Sekkel, R. A dynamic factor model for nowcasting Canadian GDP growth. Empir Econ 53, 217–234 (2017). https://doi.org/10.1007/s00181-017-1254-1
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DOI: https://doi.org/10.1007/s00181-017-1254-1