Nowcasting (economics)
Encyclopedia
The term ‘nowcasting’ is a contraction of ‘now’ and ‘forecasting’. The term is used in both economics and meteorology. This article is about its use in economics; see meteorology for its use referring to techniques used to make short-term weather forecasts, typically in the 0 to 12 hour range.
Nowcasting has recently become popular in economics. Standard measures used to assess the state of an economy, e.g., gross domestic product
(GDP), are only determined after a long delay, and are even then subject to subsequent revisions. While weather forecasters know weather conditions today and only have to predict the weather tomorrow, economists have to forecast the present and even the recent past.
Historically, nowcasting techniques have been based on simplified heuristic approaches. A recent paper by Giannone, Reichlin and Small (2008) has shown that the process of nowcasting can be formalized in a statistical model
which produces predictions without the need for informal judgement. The model exploits information from a large quantity of data series at different frequencies and with different publication lags. The idea is that signals about the direction of change in GDP can be extracted from this large and heterogeneous set of information sources (e.g., jobless figures, industrial orders, the trade balance, etc.) before GDP itself is published. In nowcasting this data is used to compute sequences of current quarter GDP estimates in relation to the real time flow of data releases.
Nowcasting models have been applied in many institutions, in particular Central Banks, and the technique is used routinely to monitor the state of the economy in real time. Selected academic research papers show how this technique has developed ,,,,,. Banbura, Giannone and Reichlin, 2010 provide a survey of the basic methods and more recent refinement .
Nowcasting has recently become popular in economics. Standard measures used to assess the state of an economy, e.g., gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP), are only determined after a long delay, and are even then subject to subsequent revisions. While weather forecasters know weather conditions today and only have to predict the weather tomorrow, economists have to forecast the present and even the recent past.
Historically, nowcasting techniques have been based on simplified heuristic approaches. A recent paper by Giannone, Reichlin and Small (2008) has shown that the process of nowcasting can be formalized in a statistical model
Statistical model
A statistical model is a formalization of relationships between variables in the form of mathematical equations. A statistical model describes how one or more random variables are related to one or more random variables. The model is statistical as the variables are not deterministically but...
which produces predictions without the need for informal judgement. The model exploits information from a large quantity of data series at different frequencies and with different publication lags. The idea is that signals about the direction of change in GDP can be extracted from this large and heterogeneous set of information sources (e.g., jobless figures, industrial orders, the trade balance, etc.) before GDP itself is published. In nowcasting this data is used to compute sequences of current quarter GDP estimates in relation to the real time flow of data releases.
Nowcasting models have been applied in many institutions, in particular Central Banks, and the technique is used routinely to monitor the state of the economy in real time. Selected academic research papers show how this technique has developed ,,,,,. Banbura, Giannone and Reichlin, 2010 provide a survey of the basic methods and more recent refinement .