Discussion paper

DP7445 MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the Euro Area

This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model specification in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coefficients, whereas MF-VAR does not restrict the dynamics and therefore can suffer from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is difficult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons.

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Citation

Schumacher, C, M Marcellino and V Kuzin (2009), ‘DP7445 MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the Euro Area‘, CEPR Discussion Paper No. 7445. CEPR Press, Paris & London. https://cepr.org/publications/dp7445