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News, Noise, and Estimates of the "True" Unobserved State of the Economy

Listed author(s):
  • Dennis J. Fixler
  • Jeremy Nalewaik

    (Bureau of Economic Analysis)

Which provides a better estimates of the growth rate of “true” U.S. output, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the idiosyncratic variation in each estimate is pure noise, taking greater variability to imply lower reliability. We develop models that relax this assumption, allowing the idiosyncratic variation in the estimates to be partly or pure news; then greater variability may imply higher information content and greater reliability. Based on evidence from revisions, we reject the pure noise assumption for GDI growth, and our results favor placing sizable weight on GDI growth because of its relatively large idiosyncratic variability. This calls into question the suitability of the pure noise assumption in other contexts, including dynamic factor models.

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Paper provided by Bureau of Economic Analysis in its series BEA Working Papers with number 0068.

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Date of creation: Mar 2010
Handle: RePEc:bea:wpaper:0068
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