A note on the predictive power of survey data in nowcasting euro area GDP

Abstract

This paper investigates the trade‐off between timeliness and quality in nowcasting practices. This trade‐off arises when the frequency of the variable to be nowcast, such as gross domestic product (GDP), is quarterly, while that of the underlying panel data is monthly; and the latter contains both survey and macroeconomic data. These two categories of data have different properties regarding timeliness and quality: the survey data are timely available (but might possess less predictive power), while the macroeconomic data possess more predictive power (but are not timely available because of their publication lags). In our empirical analysis, we use a modified dynamic factor model which takes three refinements for the standard dynamic factor model of Stock and Watson (Journal of Business and Economic Statistics, 2002, 20, 147–162) into account, namely mixed frequency, preselections and cointegration among the economic variables. Our main finding from a historical nowcasting simulation based on euro area GDP is that the predictive power of the survey data depends on the economic circumstances; namely, that survey data are more useful in tranquil times, and less so in times of turmoil.