Discussion paper
DP17800 Advances in Nowcasting Economic Activity: The Role of Heterogeneous Dynamics and Fat Tails
A key question for households, firms, and policy makers is: how is the economy doing now? This paper develops a Bayesian dynamic factor model that allows for nonlinearities, heterogeneous lead-lag patterns and fat tails in macroeconomic data. Explicitly modeling these features changes the way that different indicators contribute to the real-time assessment of the state of the economy, and substantially improves the out-of-sample performance of this class of models. In a formal evaluation, our nowcasting framework beats benchmark econometric models and professional forecasters at predicting US GDP growth in real time.
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