DP15114 Forecasting the Covid-19 recession and recovery: Lessons from the financial crisis

Author(s): Claudia Foroni, Massimiliano Marcellino, Dalibor Stevanovic
Publication Date: July 2020
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Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15114

We consider simple methods to improve the growth nowcasts and forecasts obtained by mixed frequency MIDAS and UMIDAS models with a variety of indicators during the Covid-19 crisis and recovery period, such as combining forecasts across various specifications for the same model and/or across different models, extending the model specification by adding MA terms, enhancing the estimation method by taking a similarity approach, and adjusting the forecasts to put them back on track by a specific form of intercept correction. Among all these methods, adjusting the original nowcasts and forecasts by an amount similar to the nowcast and forecast errors made during the financial crisis and following recovery seems to produce the best results for the US, notwithstanding the different source and characteristics of the financial crisis. In particular, the adjusted growth nowcasts for 2020Q1 get closer to the actual value, and the adjusted forecasts based on alternative indicators become much more similar, all unfortunately indicating a much slower recovery than without adjustment and very persistent negative effects on trend growth. Similar findings emerge also for the other G7 countries.