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Estimation of Common Factors under Cross-Sectional and Temporal Aggregation Constraints: Nowcasting Monthly GDP and its Main Components

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  • Proietti, Tommaso

Abstract

The paper estimates a large-scale mixed-frequency dynamic factor model for the euro area, using monthly series along with Gross Domestic Product (GDP) and its main components, obtained from the quarterly national accounts. The latter define broad measures of real economic activity (such as GDP and its decomposition by expenditure type and by branch of activity) that we are willing to include in the factor model, in order to improve its coverage of the economy and thus the representativeness of the factors. The main problem with their inclusion is not one of model consistency, but rather of data availability and timeliness, as the national accounts series are quarterly and are available with a large publication lag. Our model is a traditional dynamic factor model formulated at the monthly frequency in terms of the stationary representation of the variables, which however becomes nonlinear when the observational constraints are taken into account. These are of two kinds: nonlinear temporal aggregation constraints, due to the fact that the model is formulated in terms of the unobserved monthly logarithmic changes, but we observe only the sum of the monthly levels within a quarter, and nonlinear cross-sectional constraints, since GDP and its main components are linked by the national accounts identities, but the series are expressed in chained volumes. The paper provides an exact treatment of the observational constraints and proposes iterative algorithms for estimating the parameters of the factor model and for signal extraction, thereby producing nowcasts of monthly gross domestic product and its main components, as well as measures of their reliability.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6860.

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Date of creation: 22 Jan 2008
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Handle: RePEc:pra:mprapa:6860

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Related research

Keywords: Dynamic Factor Models; EM algorithm; Non Linear State Space Models; Temporal Disaggregation; Nonlinear Smoothing; Monthly GDP; Chain-linking;

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References

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Citations

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Cited by:
  1. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Nowcasting," Working Papers ECARES ECARES 2010-021, ULB -- Universite Libre de Bruxelles.
  2. Moauro, Filippo, 2010. "A monthly indicator of employment in the euro area: real time analysis of indirect estimates," MPRA Paper 27797, University Library of Munich, Germany, revised 30 Dec 2010.
  3. Christian Schumacher, 2011. "Forecasting with Factor Models Estimated on Large Datasets: A Review of the Recent Literature and Evidence for German GDP," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(1), pages 28-49, February.
  4. Bai, Jushan, 2013. "Likelihood approach to dynamic panel models with interactive effects," MPRA Paper 50267, University Library of Munich, Germany.
  5. Ángel Cuevas & Enrique M. Quilis & Antoni Espasa, 2011. "Combining benchmarking and chain-linking for short-term regional forecasting," Statistics and Econometrics Working Papers ws114130, Universidad Carlos III, Departamento de Estadística y Econometría.

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