Luke Hartigan, University of Sydney - A Monthly Activity Indicator Useful for Nowcasting Quarterly GDP Growth

Title: A Monthly Activity Indicator Useful for Nowcasting Quarterly GDP Growth
Luke Hartigan (University of Sydney) and Tom Rosewall (RBA)

Abstract:  What is happening now? The onset of the COVID-19 crisis highlighted the importance of having timely data on the economy to help policymakers make more informed decisions. However, the most comprehensive measure of economy activity, GDP, is published with a long lag, thereby limiting its value to policymakers as a measure of the current state of the economy. To overcome this information deficiency, we develop a Monthly Activity Indicator (MAI) for Australia. The MAI aims to provide policymakers with a more immediate snapshot of prevailing economic conditions. We achieve this by using a dynamic factor model to summarise the information content from a curated list of 30 targeted predictors selected for their ability to explain movements in quarterly GDP growth. We undertake a pseudo out-of-sample nowcasting exercise using the MAI in an Unrestricted MIDAS model and show statistically significant outperformance compared to standard benchmark models is possible. Critically, outperformance is greatest during the COVID-19 period, emphasising the benefit from considering monthly data. Our results demonstrate that the MAI is a useful tool for policymakers to gain a better understanding of prevailing economic conditions in Australia.

Presenter: Luke Hartigan, University of Sydney

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