Exploiting the monthly data flow in structural forecasting

By Domenico Giannone, Francesca Monti and Lucrezia Reichlin

http://d.repec.org/n?u=RePEc:boe:boeewp:0509&r=dge

This paper shows how and when it is possible to obtain a mapping from a quarterly dynamic stochastic general equilibrium (DSGE) model to a monthly specification that maintains the same economic restrictions and has real coefficients. We use this technique to derive the monthly counterpart of the well-known DSGE model by Galí, Smets and Wouters (GSW) for the US economy. We then augment it with auxiliary macro indicators which, because of their timeliness, can be used to obtain a nowcast of the structural model. We show empirical results for the quarterly growth rate of GDP, the monthly unemployment rate and GSW’s welfare-relevant output gap. Results show that the augmented monthly model does best for nowcasting.

While temporal interpolation at higher frequencies is not new, it is nifty that a structural model is used here instead of a purely statistical setup. It is significantly more complicated than traditional methods, though.

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