A Monthly Indicator of Brazilian GDP

Abstract

This paper constructs an indicator of Brazilian GDP at the monthly frequency. The peculiar instability and abrupt changes of regimes in the dynamic behavior of the Brazilian business cycle are explicitly modeled within nonlinear frameworks. In particular, a Markov switching dynamic factor model is used to combine several macroeconomic variables that display simultaneous comovements with aggregate economic activity. The model generates as output a monthly indicator of the Brazilian GDP and real time probabilities of the current phase of the Brazilian business cycle. The monthly indicator shows a remarkable historical conformity with cyclical movements of GDP. In addition, the estimated filtered probabilities predict all recessions in sample and out-of-sample. The ability of the indicator in linear forecasting growth rates of GDP is also examined within and out-of-sample. In both cases the estimated indicator displays a better predictive performance compared to a linear autoregressive model for GDP. In particular, the inclusion of lags of the indicator improves substantially forecasts of the severity of recessions and strength of expansions, as measured by the volatility of changes in GDP. These results suggest that the estimated monthly indicator can be used to forecast GDP and to monitor the state of the Brazilian economy in real time.