Exploiting the monthly data flow in structural forecasting

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 12 September 2014

Working Paper No. 509
By Domenico Giannone, Francesca Monti and Lucrezia Reichlin

This paper shows how and when it is possible to obtain a mapping from a quarterly dynamic stochastic general equilibrium (DSGE) model to a monthly specification that maintains the same economic restrictions and has real coefficients. We use this technique to derive the monthly counterpart of the
well-known DSGE model by Galí, Smets and Wouters (GSW) for the US economy. We then augment it with auxiliary macro indicators which, because of their timeliness, can be used to obtain a nowcast of the structural model. We show empirical results for the quarterly growth rate of GDP, the monthly
unemployment rate and GSW’s welfare-relevant output gap. Results show that the augmented monthly model does best for nowcasting.

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