Forecasting Baden‐Württemberg's GDP growth: MIDAS regressions versus dynamic mixed‐frequency factor models

Konstantin Kuck,Karsten Schweikert

doi:10.1002/for.2743

Abstract

AbstractGermany's economic composition is heterogenous across regions, which makes regional economic projections based on German gross domestic product (GDP) growth unreliable. In this paper, we develop forecasting models for Baden‐Württemberg's economic growth, a regional economy that is dominated by small‐ and medium‐sized enterprises with a strong focus on foreign trade. For this purpose, we evaluate the backcasting and nowcasting performance of mixed data sampling (MIDAS) regressions with forecast combinations against an approximate dynamic mixed‐frequency factor model. Considering a wide range of regional, national, and global predictors, we find that our high‐dimensional models outperform benchmark time series models. Surprisingly, we also find that combined forecasts based on simple single‐predictor MIDAS regressions are able to outperform forecasts from more sophisticated dynamic factor models.

Highlights

Projections of future economic development are important for policymakers and administrations with regard to public spending and tax revenue at both national and regional levels
As Germany is economically heterogenous across regions, economic projections at the state level cannot be directly derived from the German national gross domestic product (GDP)
We find that single-predictor mixed data sampling (MIDAS) regressions with forecast combinations perform well in regional economic forecasting exercises

Summary

Introduction

Projections of future economic development are important for policymakers and administrations with regard to public spending and tax revenue at both national and regional levels. This holds true in federal states, like Germany, where the states have certain authorities and responsibilities like the police force, health services, education, job training, and culture. The aim of this paper is to provide a multivariate forecasting model for the gross domestic product (GDP) growth of BW, an important industrial region of Germany, contributing about 15% to its GDP. As Germany is economically heterogenous across regions, economic projections at the state level cannot be directly derived from the German national GDP. The volatility of BW's GDP growth rate appears to be higher, which is reflected by a stronger downturn in BW's GDP during the Global Financial Crisis and by a more pronounced recovery thereafter

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