Daniela Bragoli

The importance of updating: Evidence from a Brazilian nowcasting model

How often should we update predictions for economic activity? Gross domestic product is a quarterly variable disseminated usually a couple of months after the end of the quarter, but many other macroeconomic indicators are released with a higher frequency, and financial markets react very strongly to them. However, most of the professional forecasters, including the IMF, the OECD, and most central banks, tend to update their forecasts of economic activity only two to four times a year. The Central Bank of Brazil, not only disseminates its official forecasts every quarter as other central banks, but also collects and publishes the results of professional forecasters’ survey data at a daily frequency. The aim of this article is to evaluate the forecasting performance of the Central Bank of Brazil Survey and to compare it with the mechanical forecasts based on state-of-the-art nowcasting techniques. Results indicate that both model and market participant predictions are well behaved, i.e. as more information becomes available their accuracy and correlation with the actual realization increases. In terms of performance the model seems to be slightly better than the institutional forecasts in the nowcast and backcast. Keywords: Nowcasting, Updating, Dynamic Factor Model. JEL classification: C33, C53, E37.

Nowcasting Indian GDP

We propose a nowcasting model for the Indian real GDP growth rate which uses the flow of relevant information to update predictions on a daily basis and can serve as a timely barometer to track the Indian development process. There are several challenges faced when nowcasting GDP in developing economies such as India. The first challenge is to proxy im- portant missing variables such as international trade in the service sector. Our novel solution augments a baseline model with series on US and Euro-area output which improves predictions, particularly during the 2008-2009 global crisis. The second challenge is the impact of sizeable revisions to the GDP data. We construct a new series for real-time Indian GDP using press releases from the Central Statistics Office (CSO), finding that data revisions have a non-trivial influence on our results. Therefore, caution should be taken when evaluating predictions using the preliminary GDP release.

R&D, capital structure and ownership concentration: evidence from Italian microdata

Abstract The purpose of the article is to provide some evidence on the interconnection between capital structure, R&D investment and ownership concentration using a unique panel data-set of Italian firms. We study the effect of R&D intensity on leverage for two groups of firms which are different in terms of their degree of ownership concentration. Our results suggest for Public Limited Companies, a nonlinear relationship between R&D intensity and leverage, with the latter first increasing and then decreasing. Interestingly, the same result is not found to hold true for Private Limited Companies, which are characterized by a more concentrated ownership.

A Nowcasting Model for Canada: Do U.S. Variables Matter?

We propose a dynamic factor model for nowcasting the growth rate of quarterly real{{p}}Canadian gross domestic product. We show that the proposed model produces more accurate nowcasts than those produced by institutional forecasters, like the Bank of Canada, the The Organisation for Economic Co-operation and Development (OECD), and the survey collected by Bloomberg, which reflects the median forecast of market participants. We show that including U.S. data in a nowcasting model for Canada dramatically improves its predictive accuracy, mainly because of the absence of timely production data for Canada. Moreover, Statistics Canada produces a monthly real GDP measure along with the quarterly one, and we show how to modify the state space representation of our model to properly link the monthly GDP with its quarterly counterpart.

Optimal Inflation Weights in the Euro Area

This study investigates the appropriate measure of inflation in the euro area that the central bank should adopt in order to minimize social welfare losses stemming from volatility in the output gap, inflation and relative prices. We use a model that accounts for both the heterogeneity observed in the degree of price rigidity across regions and sectors, and the asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or economic sector depend on complex interactions between the degree of price stickiness, a country’s economic size and the distribution of shocks across regions. Moreover, the optimal system of weights is primarily affected by the distribution of real shocks across countries. It follows that there is no simple rule of thumb for establishing the optimal weights for each region or economic sector.

The Effect of Risky Debt on R&D Investment

This paper investigates the interaction between investment decisions, company bankruptcy, and capital structure. We model young and innovative enterprises which face the possibility of making irreversible investments in R&D with uncertain returns, financed through risky debt. Uncertainty comes from two different sources: the technological success of the project and the return from investment. In an optimal investment setting, where uncertainty creates an incentive to delay investment decisions, we find the optimal threshold of entry (invest) and exit (bankruptcy), investigating both the case of infinite and finite debt maturity. We show that the potential loss of the investment option in the event of default, reduces the value of waiting and provides equity holders with an incentive to accelerate the investment. Thus the results of the model here presented seem to imply an active role for financial institutions but traditional loans may not be the most suitable solution to finance risky investment. In line with recent recommendations of the European Investment Bank (EIB, 2013), traditional bank lending might need to be reinforced through further instruments, such as loan guarantees and securitisation.