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Macroeconomic Nowcasting Using Google Probabilities

aUniversity of Strathclyde, Scotland
bEuropean Central Bank, Germany

Topics in Identification, Limited Dependent Variables, Partial Observability, Experimentation, and Flexible Modeling: Part A

ISBN: 978-1-78973-242-9, eISBN: 978-1-78973-241-2

ISSN: 0731-9053

Publication date: 30 August 2019

Abstract

Many recent chapters have investigated whether data from internet search engines such as Google can help improve nowcasts or short-term forecasts of macroeconomic variables. These chapters construct variables based on Google searches and use them as explanatory variables in regression models. We add to this literature by nowcasting using dynamic model selection (DMS) methods which allow for model switching between time-varying parameter regression models. This is potentially useful in an environment of coefficient instability and over-parameterization which can arise when forecasting with Google variables. We extend the DMS methodology by allowing for the model switching to be controlled by the Google variables through what we call “Google probabilities”: instead of using Google variables as regressors, we allow them to determine which nowcasting model should be used at each point in time. In an empirical exercise involving nine major monthly US macroeconomic variables, we find DMS methods to provide large improvements in nowcasting. Our use of Google model probabilities within DMS often performs better than conventional DMS methods.

Keywords

Acknowledgements

Acknowledgments

This research was supported by the ESRC under grant RES-062-23-2646. Gary Koop is a Fellow at the Rimini Centre for Economic Analysis. Address for correspondence: Gary Koop, Department of Economics, University of Strathclyde, 130 Rottenrow, Glasgow G4 0GE, UK. Email: Gary.Koop@strath.ac.uk

Citation

Koop, G. and Onorante, L. (2019), "Macroeconomic Nowcasting Using Google Probabilities ", Topics in Identification, Limited Dependent Variables, Partial Observability, Experimentation, and Flexible Modeling: Part A (Advances in Econometrics, Vol. 40A), Emerald Publishing Limited, Bingley, pp. 17-40. https://doi.org/10.1108/S0731-90532019000040A003

Publisher

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Emerald Publishing Limited

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