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Real-Time Macroeconomic Monitoring
Francis X. DieboldUniversity of Pennsylvania
April 28, 2014
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Economic and Financial Decision Making Over the Cycle
I Merger activity over the cycle
I Pricing and other competitive issues over the cycle
I Accounting behavior over the cycle
I Distress and bankruptcy over the cycle
I Labor/personnel decisions over the cycle
I Portfolio allocation over the cycle
I Risk management over the cycle
I Asset pricing over the cycle
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Our Approach
I Guide real people, making real decisions, in real time
I Nowcasting, updated in real-time
We want:
I Real-time information (inputs and output)
I Based on many indicators
I Quantitative (cardinal), not 0-1 (ordinal)
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Real-Time Interest is Percolating
I Conferences
I Centers
I Handbook chapters
I Policy
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Several Authors/Papers/Teams...
Aruoba, Diebold and Scotti(2009, J. Bus. and Econ. Stats.)“Real-Time Measurement of Business Conditions”
Aruoba, Diebold, et al.(2009-present, FRB Phila. RTDRC)“Real-Time ADS Index” (website)
Aruoba and Diebold (2010,American Economic Review)“Real-Time Macroeconomic Monitoring”
Aruoba, Diebold, Kose and Terrones (2011 National Bureau ofEconomic Research)“Globalization, the Business Cycle, and Macro Monitoring”
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Underlying High-Frequency Dynamic Factor Structure
Economic activity factor:
xt = φxt−1 + ηt
i th indicator:
y it = c i + βixt + εit
(Close Cousin: Stock and Watson, 1989)
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Methodological Econometric Issues
I High-frequency, mixed-frequency, missing data(Close cousin: Mariano and Murasawa, 2003)
I Time-varying system matrices
I Modified filtering and likelihood evaluation
I Optimal extraction of latent macroeconomic activity
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State Space Representation
yt = Zαt + εt
αt+1 = Tαt + Rηt
εt ∼ (0,H) , ηt ∼ (0,Q)
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Kalman Filter Extraction of Latent Economic Activity
at|t = at + PtZ′F−1t vt
Pt|t = Pt − PtZ′F−1t ZP ′t
at+1 = Tat|t
Pt+1 = TPt|tT′ + RQR ′
where
vt = yt − Zat
Ft = ZPtZ′ + H
at|t ≡ E (αt |Yt), Pt|t = var (αt |Yt), at ≡ E (αt |Yt−1),Pt = var (αt |Yt−1), Yt ≡ {y1, ..., yt}
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Filtering with Missing Data
All of yt missing (skip updating):
at+1 = Tat
Pt+1 = TPtT′ + RQR
Some of yt missing (update w/ modified measurement eqn.):
y∗t = Z ∗αt + ε∗t
ε∗t ∼ N (0,H∗)
y∗t = Wtyt , Z∗ = WtZ , ε
∗t = Wtεt , H
∗ = WtHW′t
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Likelihood Evaluation with Missing Data
ln L =T∑t=1
ln lt
where:
ln lt = 0, if no elements of yt are observed
ln lt = −12
(N∗ log 2π +
(log |F ∗t |+ v∗′t F ∗−1t v∗t
)), otherwise
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Substantive Macroeconomic Issues
I What indicators, at what frequencies?
I How has real activity behaved historically?
I What happened to real activity during the Great Crisis of2007-2009?
I Where is the economy now?
I What about inflation?
I What about the global economy?
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Real Activity
I [ Initial unemployment claims (weekly) ]
I Payroll employment (monthly)
I Industrial production (monthly)
I Personal income less transfers (monthly)
I Manufacturing and trade sales (monthly)
I GDP (quarterly)
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-8
-6
-4
-2
0
2
4
6
60 65 70 75 80 85 90 95 00 05
Real Activity Index
I Coherence with NBERI Less noisy than individual indicatorsI “Great Moderation”I Recent episode
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-6
-4
-2
0
2
4
1973 1974 1975
1973-1975 Recession
-6
-4
-2
0
2
4
1979 1980 1981
1980 Recession
-6
-4
-2
0
2
4
1981 1982 1983
1981-1982 Recession
-6
-4
-2
0
2
4
1990 1991 1992
1990-1991 Recession
-6
-4
-2
0
2
4
2000 2001 2002
2001 Recession
-6
-4
-2
0
2
4
2007 2008 2009
2007-2009 Recession
Real Activity Index During Recessions
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2007-2009: Moderately Extreme Depth Severity
1
2
3
4
5
6
7
Recession Depth Severity
60-61 69-70 73-75 80 81-82 90-91 01 07-09
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2007-2009: Extreme Duration Severity
4
6
8
10
12
14
16
18
20
Recession Duration Severity
60-61 69-70 73-75 80 81-82 90-91 01 07-09
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2007-2009: Highly Extreme Overall Severity
10
15
20
25
30
35
40
45
50
Overall Recession Severity
60-61 69-70 73-75 80 81-82 90-91 01 07-09
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Real-time real activity index updates at:
Federal Reserve Bank of Philadelphia
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Inflation
I All items CPI (monthly)
I Finished goods PPI (monthly)
I Standard and Poor’s GSCI Non-Energy Commodities Index(monthly)
I Spot price of West Texas intermediate crude oil (monthly)
I Hourly compensation in the non-farm business sector(quarterly)
I GDP deflator (quarterly)
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-8
-6
-4
-2
0
2
4
6
8
60 65 70 75 80 85 90 95 00 05
Inflation Index
I Great inflation, Volcker containment
I Increased volatility post-2000
I Recent episode
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-8
-6
-4
-2
0
2
4
07M01 07M07 08M01 08M07 09M01 09M07
Inflation Index, 2007-2009
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Real Activity and Inflation Interaction
I Demand shocks: Real activity and inflation positivelycorrelated
I Supply shocks: Real activity and inflation negatively correlated
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-8
-6
-4
-2
0
2
4
6
-8
-4
0
4
8
60 65 70 75 80 85 90 95 00 05
Real Activity and Inflation Indexes
Inflation
RealActivity
I Usually positively correlated
I Negatively correlated during oil shocks
I Recent episode
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-6
-4
-2
0
2
-8
-6
-4
-2
0
2
4
07M01 07M07 08M01 08M07 09M01 09M07
Real Activity and Inflation Indexes, 2007-2009
Inflation
RealActivity
I Positive correlation
I A Keynesian demand-driven recession
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Going Global: An Extracted G-7 Factor
-5
-4
-3
-2
-1
0
1
2
3
1970 1975 1980 1985 1990 1995 2000 2005
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Comparative Behavior of Country Factorsin Two Recessions
-5
-4
-3
-2
-1
0
1
2
3
4
I II III IV I II III IV I II III IV
1973 1974 1975
Country Factors around 1974
-6
-5
-4
-3
-2
-1
0
1
I II III IV I II III IV I II III IV
2007 2008 2009
U.S. U.K. Canada
Japan France Germany
Italy
Country Factors around 2008
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Concluding Remarks
This time was not different, but it was certainly severe.
Extensions include:
I Higher-frequency component indicators
I Richer component indicators (e.g., GDPE and GDPI )
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Recommended