Real-Time Nowcasting. Francis X. Diebold University of Pennsylvania. July 12, 2011

Transcription

1 Real-Time Nowcasting Francis X. Diebold University of Pennsylvania July 1, 11 1 / 9

2 Economic and Financial Decision Making Over the Cycle Merger activity over the cycle Pricing and other competitive issues over the cycle Accounting behavior over the cycle Distress and bankruptcy over the cycle Labor/personnel decisions over the cycle Portfolio allocation over the cycle Risk management over the cycle Asset pricing over the cycle / 9

3 Our Approach Guide real people, making real decisions, in real time Nowcasting, updated in real-time We want: Real-time information (inputs and output) Based on many indicators Quantitative (cardinal), not -1 (ordinal) 3 / 9

4 Real-Time Interest is Percolating Conferences Centers Handbook chapters Policy / 9

5 Underlying High-Frequency Dynamic Factor Structure Economic activity factor: x t = φx t 1 + η t i th indicator: y i t = c i + β i x t + ε i t (Close Cousin: Stock and Watson, 1989) 5 / 9

6 Methodological Econometric Issues High-frequency, mixed-frequency, missing data (Close cousin: Mariano and Murasawa, 3) Time-varying system matrices Modified filtering and likelihood evaluation Optimal extraction of latent macroeconomic activity 6 / 9

7 State Space Representation y t = Zα t + ε t α t+1 = T α t + Rη t ε t (, H), η t (, Q) 7 / 9

8 Kalman Filter Extraction of Latent Economic Activity where a t t = a t + P t Z Ft 1 v t P t t = P t P t Z Ft 1 ZP t a t+1 = Ta t t P t+1 = TP t t T + RQR v t = y t Za t F t = ZP t Z + H a t t E (α t Y t ), P t t = var (α t Y t ), a t E (α t Y t 1 ), P t = var (α t Y t 1 ), Y t {y 1,..., y t } 8 / 9

9 Filtering with Missing Data All of y t missing (skip updating): a t+1 = Ta t P t+1 = TP t T + RQR Some of y t missing (update w/ modified measurement eqn.): yt = Z α t + ε t ε t N (, H ) y t = W t y t, Z = W t Z, ε t = W t ε t, H = W t HW t 9 / 9

10 Likelihood Evaluation with Missing Data where: T ln L = ln l t t=1 ln l t =, if no elements of y t are observed ln l t = 1 ( N log π + ( log F t + v t Ft 1 vt )), otherwise 1 / 9

11 Substantive Macroeconomic Issues What indicators, at what frequencies? How has real activity behaved historically? What happened to real activity during the Great Crisis of 7-9? Where is the economy now? What about inflation? What about the global economy? 11 / 9

12 Real Activity [ Initial unemployment claims (weekly) ] Payroll employment (monthly) Industrial production (monthly) Personal income less transfers (monthly) Manufacturing and trade sales (monthly) GDP (quarterly) 1 / 9

13 Real Activity Index Coherence with NBER Less noisy than individual indicators Great Moderation Recent episode 13 / 9

14 -6 Real Activity Index During Recessions Recession 198 Recession Recession Recession 1 Recession 7-9 Recession / 9

15 7-9: Moderately Extreme Depth Severity 7 Recession Depth Severity / 9

16 7-9: Extreme Duration Severity Recession Duration Severity / 9

17 7-9: Highly Extreme Overall Severity Overall Recession Severity / 9

18 Real-time real activity index updates at: Federal Reserve Bank of Philadelphia 18 / 9

19 Inflation All items CPI (monthly) Finished goods PPI (monthly) Standard and Poor s GSCI Non-Energy Commodities Index (monthly) Spot price of West Texas intermediate crude oil (monthly) Hourly compensation in the non-farm business sector (quarterly) GDP deflator (quarterly) 19 / 9

20 Inflation Index Great inflation, Volcker containment Increased volatility post- Recent episode / 9

21 Inflation Index, M1 7M7 8M1 8M7 9M1 9M7 1 / 9

22 Real Activity and Inflation Interaction Demand shocks: Real activity and inflation positively correlated Supply shocks: Real activity and inflation negatively correlated / 9

23 Real Activity and Inflation Indexes Inflation Real Activity Usually positively correlated Negatively correlated during oil shocks Recent episode 3 / 9

24 Real Activity and Inflation Indexes, 7-9 Inflation - - Real Activity -6 7M1 7M7 8M1 8M7 9M1 9M Positive correlation A Keynesian demand-driven recession / 9

25 Going Global: An Extracted G-7 Factor / 9

26 Comparative Behavior of Country Factors in Two Recessions Country Factors around I II III IV I II III IV I II III IV Country Factors around I II III IV I II III IV I II III IV / 9

27 Conclusion This time was not different, but it was certainly severe. 7 / 9

28 Several Authors/Papers/Teams... Aruoba, Diebold and Scotti (9, J. Bus. and Econ. Stats.) Real-Time Measurement of Business Conditions Aruoba, Diebold, et al. (9-present, FRB Phila. RTDRC) Real-Time ADS Index (website) Aruoba and Diebold (1, American Economic Review) Real-Time Macroeconomic Monitoring Aruoba, Diebold, Kose and Terrones (11 NBER, in press) Globalization, the Business Cycle, and Macro Monitoring 8 / 9

29 Extensions Richer component indicators Higher-frequency component indicators Regional aspects of the cycle 9 / 9