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Forecasting GDP with global components. This time is different

Bjørnland, Hilde C.; Ravazzolo, Francesco; Thorsrud, Leif Anders
Working paper
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URI
http://hdl.handle.net/11250/2364595
Date
2015
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  • Centre for Applied Macro- and Petroleum economics (CAMP) [104]
Abstract
A long strand of literature has shown that the world has become more

global. Yet, the recent Great Global Recession turned out to be hard to predict,

with forecasters across the world committing large forecast errors. We examine

whether knowledge of in-sample co-movement across countries could have been

used in a more systematic way to improve forecast accuracy at the national level.

In particular, we ask if a model with common international business cycle factors

forecasts better than the purely domestic alternative? To answer this question

we employ a Dynamic Factor Model (DFM) and run an out-of-sample forecast-

ing experiment.

Our results show that exploiting the informational content in a

common global business cycle factor improves forecasting accuracy in terms of

both point and density forecast evaluation across a large panel of countries. In

line with much reported in-sample evidence, we also document that the Great

Recession has a huge impact on this result. The event causes a clear preference

shift towards the model including a common global factor. Similar shifts are

not observed earlier in the evaluation sample. However, this time is different

also in other respects. On longer forecasting horizons the performance of the

DFM deteriorates substantially in the aftermath of the Great Recession. This

indicates that the recession shock itself was felt globally, but that the recovery

phase has been very different across countries.
Series
CAMP Working Papers Series;1/2015

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