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Friday, December 16, 2005

Are Monthly Data Releases Informative?

The CPI report for November shows a .6% decline in the CPI due to falling energy prices, but core inflation is up .2 % which is the same as the previous month's increase (good discussion here). Monthly data are very noisy and subject to large revisions, so much so that it is possible that the noise in these data exceeds the signal making the data more confusing than helpful. How informative are monthly data releases for forecasting current quarter GDP and inflation? This paper finds that the "information matters in the sense that the precision of the signal increases ... as new data are released":

Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases, by Domenico Giannone, ECARES and European Central Bank, Lucrezia Reichlin, European Central Bank and CEPR, David Small, Board of Governors, Federal Reserve, September 2005: Abstract This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing "news" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation while GDP is only affected by real variables and interest rates. [SSRN link, CEPR link]

    Posted by on Friday, December 16, 2005 at 05:12 PM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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