Real-time forecasting US GDP from small-scale factor models

Camacho, Maximo; Martinez-Martin, Jaime
August 2014
Empirical Economics;Aug2014, Vol. 47 Issue 1, p347
Academic Journal
We show that the single-index dynamic factor model developed by Aruoba and Diebold (Am Econ Rev, 100:20-24, ) to construct an index of the US business cycle conditions is also very useful to forecast US GDP growth in real time. In addition, we adapt the model to include survey data and financial indicators. We find that our extension is unequivocally the preferred alternative to compute backcasts. In nowcasting and forecasting, our model is able to forecast growth as well as AD and better than several baseline alternatives. Finally, we show that our extension could also be used to infer the US business cycles very precisely.


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