Assessing the Impact of Policy Changes on a Nowcast

IMF Working Papers, July 28, 2023

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Nowcasting provides forecasts of key macroeconomic indicators using higher frequency data to deliver more timely information for proposed policy changes.
A major limitation of standard nowcasting estimators is their “reduced-form” nature, which prevents assessing the impact of policy changes on baseline nowcasts (for example, on the baseline nowcast of real GDP).
The paper outlines two methodologies to overcome this limitation and illustrates each with a country-specific example.

Partial equilibrium approach
- Uses an existing baseline nowcasting regression.
- Combines that regression with single-equation forecasting models for the high-frequency data included in the nowcasting regression.
Non-parametric structural VAR approach
- Uses a non-parametric structural VAR estimator introduced in Ouliaris and Pagan (2022).
- Imposes minimal identifying restrictions on the data to estimate the impact of structural shocks.

Each methodological approach is illustrated using a country-specific example.
Subject areas and keywords highlighted in the source include:
- Econometric analysis, Economic forecasting, Oil prices, Prices, Structural vector autoregression, Vector autoregression
- baseline Nowcasting regression, Caribbean, frequency data, Global, high frequency indicators, impulse responses, Nowcasting, Oil prices, Real GDP of Dominica, structural models, Structural vector autoregression, USA real GDP, Vector autoregression, year-on-year percentage

Provides practical frameworks to move from reduced-form nowcasts to counterfactual assessment of policy changes.
Enables policy analysis that links high-frequency indicator forecasting to impacts on baseline nowcasts of macroeconomic variables such as real GDP.
Offers a complementary pair of tools: a partial-equilibrium, regression-based strategy suitable when a baseline nowcast exists, and a structural VAR-based strategy suited when structural shock identification with minimal restrictions is preferred.

Source: Assessing the Impact of Policy Changes on a Nowcast, Sam Ouliaris and Celine Rochon, July 28, 2023.