Midas Vs. Mixed-Frequency VAR: Nowcasting GDP in the Euro Area
25 Pages Posted: 7 Oct 2009
Date Written: September 2009
Abstract
This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model specification in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coefficients, whereas MF-VAR does not restrict the dynamics and therefore can suffer from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is difficult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons.
Keywords: euro area growth, MIDAS, mixed-frequency data, mixed-frequency VAR, nowcasting
JEL Classification: C53, E37
Suggested Citation: Suggested Citation
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