Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-09-27
Revision-Date: 2023-03-01
Number: 22-069/III
Author-Name: Bart Keijsers
Author-Workplace-Name: University of Amsterdam
Author-Name: Dick van Dijk
Author-Workplace-Name: Erasmus University Rotterdam
Title: Does economic uncertainty predict real activity in real-time?
Abstract: We assess the predictive ability of 15 economic uncertainty measures in a real-time
out-of-sample forecasting exercise for The Conference Board’s coincident economic
index and its components (industrial production, employment, personal income,
and manufacturing and trade sales). The results show that the measures hold
(real-time) predictive power for quantiles in the left tail. Because uncertainty
measures are all proxies of an unobserved entity, we combine their information using
principal component analysis. A large fraction of the variance of the uncertainty
measures can be explained by two factors. First, a general economic uncertainty
factor with a slight tilt toward financial conditions. Second, a consumer/media
confidence index which remains elevated after recessions. Using a predictive
regression model with the factors from the set of uncertainty measures yields more
consistent gains compared to a model with an individual uncertainty measure.
Further, although often better forecasts are obtained using the National Financial
Conditions Index (NFCI), the uncertainty factor models are comparable when
forecasting employment and in general the uncertainty factors have some predictive
content that is complementary to the NFCI.
Classification-JEL: E27, C21, C38
Keywords: Economic uncertainty, real-time forecasting, quantile forecasting, factor analysis
File-URL: https://papers.tinbergen.nl/22069.pdf
File-Format: application/pdf
File-Size: 783.463 bytes
Handle: RePEc:tin:wpaper:20220069