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Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available

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  • Nilss Olekalns
  • Kalvinder Shields
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    Abstract

    A canonical model is described which reflects the real time informational context of decision-making. Comparisons are drawn with ‘conventional’ models that incorrectly omit market-informed insights on future macroeconomic conditions and inappropriately incorporate information that was not available at the time. It is argued that conventional models are misspecified and misinterpret news. However, neither diagnostic tests applied to the conventional models nor typical impulse response analysis will be able to expose these deficiencies clearly. This is demonstrated through an analysis of quarterly US data 1968q4-2006q1. However, estimated real time models considerably improve out-of-sample forecasting performance, provide more accurate ‘nowcasts’ of the current state of the macroeconomy and provide more timely indicators of the business cycle. The point is illustrated through an analysis of the US recessions of 1990q3—1991q2 and 2001q1—2001q4

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    Bibliographic Info

    Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1040.

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    Length: 45 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:mlb:wpaper:1040

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    Keywords: Structural Modelling; Real Time Data; Nowcasting; Business Cycles;

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