1. Challenges for estimating and forecasting macroeconomic trends during financial crises: implications for counter-cyclical policies
Pingfan Hong
Chief for Global Economic Monitoring
UN/DESA
International Seminar at Ottawa, Canada
27-29 May 2009
Views expressed here are solely those of the speaker and they do not necessarily represent those of the United Nations

2. Outline
Introduction
Forecasting performance of UN/LINK global modeling system
High Frequency Modeling for Rolling estimation and forecast
“turning point”: Over-year-ago (oya) Quarterly GDP growth versus Seasonally Adjusted Annual Rate (SAAR) of Quarterly GDP growth
The importance of correctly estimating potential output

3. Introduction Estimating versus forecasting Estimating: Forecasting:
Importance of estimating and forecasting for counter-cyclical macroeconomic policy: timeliness, consistent, accuracy, “turning point”, and correct estimate of the potential gap

4. Forecasting performance of UN/LINK global modeling (1)

5. Forecasting performance of UN/LINK global modeling (2)

6. Forecasting performance of UN/LINK global modeling (3)

7. Forecasting performance of UN/LINK global modeling (4)
world
developed economies
developing countries
Mean
0.02
0.04
-0.36
Median
0.05
-0.1
Standard Deviation
0.7
0.76
1.25
Fraction of positive errors
0.52
0.5
0.42
Serial correlation
-0.2
0.29
Source: DESA

8. High Frequency Modeling for rolling estimating quarterly GDP
Collecting weekly data stream
Principle Component
ARIMA
Weekly rolling estimate and forecast of quarterly GDP
Sources for slides 8-12: L.R. Klein and W. Mak, University of Pennsylvania Current Quarter Model of the United States Economy
Y. Inada, Konan University Current Quarter Model Forecast For the Japanese Economy

9. Example: US weekly data stream
Date Economic Indicator for Latest Prior Month
Apr 01 Construction Spending February -0.9% -3.5%
Apr 01 Auto Sales March 9.9 Million 9.1 Million
Apr 02 Manuf Ships, Inv, & Orders February -0.1%, -1.2%, 1.8% -2.6%, -1.1%, -3.5%
Apr 03 Nonfarm Payroll Employment March -663, ,000
Apr 07 Consumer Credit Outstanding February -$7.5 billion $8.1 billion
Apr 09 Export/Import Price Index March -0.6%, 0.5% -0.3%, -0.1%
Apr 09 Trade Balance February -$26.0 billion -$36.2 billion
Apr 15 Producer Price Index, Total & Core March -1.2%, 0.0% 0.1%, 0.2%
Apr 14 Retail Sales, Total & Ex-Auto March -1.1%, 0.9% 0.3%, 1.0%
Apr 15 Industrial Production March -1.5% -1.5%
Apr 14 Business Inventories February -1.3% -1.3%
Apr 15 Consumer Price Index, Total & Core March -0.1%, 0.2% 0.4%, 0.2%
Apr 16 Housing Starts February 510, ,000

10. Example: indicators used in US model for estimating quarterly GDP
Industrial Production Index
Manufacturers’ orders, deflated by producer price index
Manufacturers’ shipments, deflated by producer price index
Manufacturers’ unfilled orders, deflated by producer price index
Yield spread between 6-month commercial paper and 6-month treasury bills
Real interest rate (6-month commercial paper yield adjusted by consumer price index)
Real M1, adjusted by consumer price index
Real retail sales, adjusted by consumer price index
Real personal income, adjusted by consumer price index
Real 10-year treasury yield
Yield spread between 10- and 1-year treasury bills
Nonfarm payrolls
Average weekly hours, production workers: total private
Trade-weighted value of the US dollar, nominal broad dollar index

11. Example: Equations for GDP and PGDP in US model
Dlog (QGDP) = 0684 – Dlog C1
Dlog C2
Dlog C6
– Dlog C7
AR(1)
– MA(1)
Dlog (QPGDP) = – Dlog C Dlog C2
Dlog C3 – Dlog C4
Dlog C5 – Dlog C6
MA(4)

12. Example: Japan H-F model forecast versus consensus forecast
Source: Y. Inada

13. Convergence in the rolling forecast of the US H-F model
Mean error
-2.625
-0.665
RMSE
1.4058

14. Convergence in the rolling forecast of the Japan H-F model
Mean error
-4.65
-4.675
-3.175
-1.175
RMSE

15. “turning point”: oya versus SAAR Example of China’s GDP
Sources: China NBS, JPM

16. Importance of correct estimate of potential output for counter cyclical macroeconomic policy
Taylor rule:
Hodrick-Prescott filter to estimate potential GDP growth :
versus production function to estimate potential GDP growth

17. Estimate of output Gap for the US economy by H-P filter

18. Estimate output Gap for the US economy by production function
Source: Business Week

19. Are these Output GAPs corrected estimated?
Output gap % of GDP
Record levels of
spare capacity 09 10 11
Source: World Bank.

20. Concluding remarks
It’s a big challenge to make a timely and consistent estimate and forecast for economic trends during financial crisis
But they are crucial for macroeconomic policies
We can make improvement