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Constructing GDP Nowcasting Models Using Alternative Data

Author

Listed:
  • Takashi Nakazawa

    (Bank of Japan)

Abstract
With coronavirus (COVID-19) having a significant impact on economic activity, the existing GDP nowcasting model, using only monthly and quarterly economic data, has become difficult to forecast with high accuracy. In this paper, we attempt to improve the accuracy of GDP nowcasting models by using alternative data that are available more promptly. Specifically, we construct nowcasting models that incorporate sparse estimation by Elastic Net using weekly retail sales data and hundreds of daily Internet search volume data, in addition to conventional monthly economic data. For the model formulation and data selection, we prepare a large number of candidate models using the method of forecast combination, which combines multiple forecasting models, and select "Best models" which minimize the forecast error, including data after the spread of COVID-19. The analysis shows that the use of alternative data significantly improves the forecasting accuracy of the model, especially at the 2-month prior to release of GDP, when the availability of monthly and quarterly economic data are limited.

Suggested Citation

  • Takashi Nakazawa, 2022. "Constructing GDP Nowcasting Models Using Alternative Data," Bank of Japan Working Paper Series 22-E-9, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp22e09
    as

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    File URL: https://www.boj.or.jp/en/research/wps_rev/wps_2022/data/wp22e09.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Kakuho Furukawa & Ryohei Hisano & Yukio Minoura & Tomoyuki Yagi, 2022. "A Nowcasting Model of Industrial Production using Alternative Data and Machine Learning Approaches," Bank of Japan Working Paper Series 22-E-16, Bank of Japan.
    2. Tomohiro Okubo & Koji Takahashi & Haruhiko Inatsugu & Masato Takahashi, "undated". "Development of "Alternative Data Consumption Index":Nowcasting Private Consumption Using Alternative Data," Bank of Japan Working Paper Series 22-E-8, Bank of Japan.
    3. Kakuho Furukawa & Ryohei Hisano, 2022. "A Nowcasting Model of Exports Using Maritime Big Data," Bank of Japan Working Paper Series 22-E-19, Bank of Japan.

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    More about this item

    Keywords

    Nowcasting; Alternative Data; Elastic Net; Forecast Combination;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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