Direct vs bottom–up approach when forecasting GDP: Reconciling literature results with institutional practice

How should we forecast GDP? Should we forecast directly the overall GDP or aggregate the forecasts for each of its components using some level of disaggregation? The search for the answer continues to motivate several horse races between these two approaches. Nevertheless, independently of the results, institutions producing short-term forecasts usually opt for a bottom–up approach. This paper uses an application for the euro area to show that the option between direct and bottom–up approaches as the level of disaggregation chosen by forecasters is not determined by the results of those races.