Nowcasting GDP using machine-learning algorithms: A real-time assessment

Abstract

Can machine-learning algorithms help central banks understand the current state of the economy? Our results say yes! We contribute to the emerging literature on forecasting macroeconomic variables using machine-learning algorithms by testing the nowcast performance of common algorithms in a full 'real-time' setting-that is, with real-time vintages of New Zealand GDP growth (our target variable) and real-time vintages of around 600 predictors. Our results show that machine-learning algorithms are able to significantly improve over a simple autoregressive benchmark and a dynamic factor model. We also show that machine-learning algorithms have the potential to add value to, and in one case improve on, the official forecasts of the Reserve Bank of New Zealand. (C) 2020 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.