24 March 2020

ECB: Real-time weakness of the global economy: a first assessment of the coronavirus crisis

Motivated by recent events that signal a potentially global synchronized slowdown, authors propose an econometric framework able to provide timely and accurate real-time inferences about the state of the world economy.

Authors introduce a mixed frequency dynamic factor model that allows for heterogeneous deepness across recessionary episodes.

The proposed model is fitted to twelve of the world’s largest economic regions. Their estimates show that allowing heterogeneous recessions turns to be crucial in accurately inferring periods of weak real activity growth associated with both advanced and emerging economies, outperforming frameworks previously proposed in the literature.

Next, the estimated regional inferences are summarized into a Global Weakness Index (GWI), which is able to provide daily real-time updates of the global economy strength, its underlying sources, and risk assessments, as new information across the regions is released.

The proposed framework for monitoring the state of the world economy can be extended in different ways. For example, by determining the most adequate set of economic indicators associated to each region in order to maximize the accuracy when inferring region-specific recessions.

Also, a wider range of regions can be incorporated in the construction of the global weakness index with the aim of sharpen the accuracy when inferring world recessions.

Full working paper on ECB

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