Forecasting GDP Growth Using Mixed-Frequency Models With Switching Regimes

For modelling mixed-frequency data with business cycle pattern we introduce the Markovswitching Mixed Data Sampling model with unrestricted lag polynomial (MS-U-MIDAS). Usually models of the MIDAS-class use lag polynomials of a specific function, which impose some structure on the weights of regressors included in the model. This may deteriorate the predictive power of the model if the imposed structure differs from the data generating process. When the difference between the available data frequencies is small and there is no risk of parameter proliferation, using an unrestricted lag polynomial might not only simplify the model estimation, but also improve its forecasting performance. We allow the parameters of the MIDAS model with unrestricted lag polynomial to change according to a Markov-switching scheme in order to account for the business cycle pattern observed in many macroeconomic variables. Thus we combine the unrestricted MIDAS with a Markov-switching approach and propose a new Markov-switching MIDAS model with unrestricted lag polynomial (MS-U-MIDAS). We apply this model to a large dataset with the help of factor analysis. Monte Carlo experiments and an empirical forecasting comparison carried out for the U.S. GDP growth show that the models of the MS-UMIDAS class exhibit similar or better nowcasting and forecasting performance than their counterparts with restricted lag polynomials.