2007-2013: This is what the indicator told us ? Evaluating the performance of real-time nowcasts from a dynamic factor model

TL;DRAbstract

In 2007, a new indicator of economic activity for Luxembourg was elaborated at the BcL. It was developed using a large dataset of about 100 economic and financial time series. The methodology was based on the generalized dynamic-factor models, and the model was estimated over the period from June 1995 to June 2007. Forecast performance was evaluated on several criteria (both in pseudo-real-time and using ex-post in-sample simulations) and results were satisfactory. They gave in particular clear evidence that the indicator provides better forecasts of GDP growth than a more standard approach that relies on past GDP values only. In this paper, we present results of the real-time use of the indicator from December 2007 onwards. Special attention is given to real-time forecasts of GDP growth and the real-time assessment of the economic situation that were made during the financial crisis. The root mean squared forecast error of the indicator-based GDP growth forecasts have decreased during

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