Discussion Paper Details

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

Author(s): Vladimir Kuzin, Massimiliano Marcellino and Christian Schumacher

Publication Date: September 2009

Keyword(s): euro area growth, MIDAS, mixed-frequency data, mixed-frequency VAR and nowcasting

Programme Area(s): International Macroeconomics

Abstract: 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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Bibliographic Reference

Kuzin, V, Marcellino, M and Schumacher, C. 2009. 'MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the Euro Area'. London, Centre for Economic Policy Research.