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News, noise, and estimates of the "true" unobserved state of the economy

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

Which provides a better estimate of the "true" state of the U.S. economy, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the difference between each estimate and the "true" state of the economy is pure noise, taking greater variability to imply lower reliability. We posit instead that each difference may be pure news; then greater variability implies higher information content and greater reliability. This is a general point, applicable to numerous situations beyond the case of combining GDP and GDI. For that particular case, we analyze various vintages of estimates, developing models for combining GDP and GDI under the differing assumptions, and use revisions to show the news assumption is probably more accurate.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-34.

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Date of creation: 2007
Handle: RePEc:fip:fedgfe:2007-34
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  2. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
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  17. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
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  19. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2005. "Nowcasting GDP and Inflation: The Real Time Informational Content of Macroeconomic Data Releases," CEPR Discussion Papers 5178, C.E.P.R. Discussion Papers.
  20. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
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