On the Advantages of Disaggregated Data: Insights from Forecasting the U.S. Economy in a Data-Rich Environment

The good forecasting performance of factor models has been well documented in the literature. While many studies focus on a very limited set of variables (typically GDP and inflation), this study evaluates forecasting performance at disaggregated levels to examine the source of the improved forecasting accuracy, relative to a simple autoregressive model. We use the latest revision of over 100 U.S. time series over the period 1974-2009 (monthly and quarterly data). We employ restrictions derived from national accounting identities to derive jointly consistent forecasts for the different components of U.S. GDP. In line with previous studies, we find that our factor model yields vastly improved forecasts for U.S. GDP, relative to simple autoregressive benchmark models, but we also conclude that the gains in terms of forecasting accuracy differ substantially between GDP components. As a rule of thumb, the largest improvements in terms of forecasting accuracy are found for relatively more volatile series, with the greatest gains coming from improvements of the forecasts for investment and trade. Consumption forecasts, in contrast, perform only marginally better than a simple AR benchmark model. In addition, we show that for most GDP components, an unrestricted, direct forecast outperforms forecasts subject to national accounting identity restrictions. In contrast, GDP itself is best forecasted as the sum of individual forecasts for GDP components, but the improvement over a direct, unconstrained factor forecast is small.Econometric and statistical methods; International topics

Financial constraints and the cash-holding behaviour of Canadian firms

The proportion of assets held by the average Canadian firm in the form of cash has increased steadily since the early 1990s, and is now roughly twice as large as in 1990. The literature has established that the cash-holding behaviour of firms is highly correlated with financial constraints and firm characteristics. The authors use a firm-level data set covering Canadian firms from 1980 to 2006 to understand which firm characteristics are associated with higher cash holdings. They find that financial constraints are likely important for explaining firms' higher cash holdings, and that the recent increase in the cash holdings of Canadian firms can be almost entirely explained by changes in firm characteristics. Specifically, higher recent cash holdings are correlated with the average Canadian firm having become smaller, having more variable cash flow, holding lower levels of cash substitutes, having higher expenditure on research and development, and being more likely to be financially distressed. The authors also find that the average Canadian firm has a cash ratio that is only slightly higher than would be predicted by out-of-sample forecasts over the 1990s and 2000s, though the divergence between the actual and predicted values has been increasing in recent years

On the advantages of disaggregated data: Insights from forecasting the US economy in a data-rich environment

The good forecasting performance of factor models has been well documented in the literature. While many studies focus on a very limited set of variables (typically GDP and inflation), this study evaluates forecasting performance at disaggregated levels to examine the source of the improved forecasting accuracy, relative to a simple autoregressive model. We use the latest revision of over 100 U.S. time series over the period 1974-2009 (monthly and quarterly data). We employ restrictions derived from national accounting identities to derive jointly consistent forecasts for the different components of U.S. GDP. In line with previous studies, we find that our factor model yields vastly improved forecasts for U.S. GDP, relative to simple autoregressive benchmark models, but we also conclude that the gains in terms of forecasting accuracy differ substantially between GDP components. As a rule of thumb, the largest improvements in terms of forecasting accuracy are found for relatively more volatile series, with the greatest gains coming from improvements of the forecasts for investment and trade. Consumption forecasts, in contrast, perform only marginally better than a simple AR benchmark model. In addition, we show that for most GDP components, an unrestricted, direct forecast outperforms forecasts subject to national accounting identity restrictions. In contrast, GDP itself is best forecasted as the sum of individual forecasts for GDP components, but the improvement over a direct, unconstrained factor forecast is small

Financial Constraints and the Cash-Holding Behaviour of Canadian Firms

The proportion of assets held by the average Canadian firm in the form of cash has increased steadily since the early 1990s, and is now roughly twice as large as in 1990. The literature has established that the cash-holding behaviour of firms is highly correlated with financial constraints and firm characteristics. The authors use a firm-level data set covering Canadian firms from 1980 to 2006 to understand which firm characteristics are associated with higher cash holdings. They find that financial constraints are likely important for explaining firms' higher cash holdings, and that the recent increase in the cash holdings of Canadian firms can be almost entirely explained by changes in firm characteristics. Specifically, higher recent cash holdings are correlated with the average Canadian firm having become smaller, having more variable cash flow, holding lower levels of cash substitutes, having higher expenditure on research and development, and being more likely to be financially distressed. The authors also find that the average Canadian firm has a cash ratio that is only slightly higher than would be predicted by out-of-sample forecasts over the 1990s and 2000s, though the divergence between the actual and predicted values has been increasing in recent years.Sectoral balance sheet

The macroeconomic implications of changes in bank capital and liquidity requirements in Canada: Insights from the BoC-GEM-FIN

The authors use simulations within the BoC-GEM-FIN, the Bank of Canada's version of the Global Economy Model with financial frictions in both the demand and supply sides of the credit market, to investigate the macroeconomic implications of changing bank regulations on the Canadian economy. Specifically, they compute short- and long-run impacts on key macroeconomic and financial variables following increases in the minimum required capital and liquidity ratios. The results indicate that, while long-run effects on bank loans, lending spreads, investment, and output are modest, the short-run effects are non-negligible. In addition, the time horizon for implementing the regulatory changes and the response of monetary policy substantially affect the macroeconomic outcomes. Finally, increasing the required bank capital ratio in other economies roughly doubles the size and duration of the economic downturn in Canada, compared to the case where the increase is implemented only in the Canadian banking sector

The Macroeconomic Implications of Changes in Bank Capital and Liquidity Requirements in Canada: Insights from the BoC-GEM-FIN

The authors use simulations within the BoC-GEM-FIN, the Bank of Canada’s version of the Global Economy Model with financial frictions in both the demand and supply sides of the credit market, to investigate the macroeconomic implications of changing bank regulations on the Canadian economy. Specifically, they compute short- and long-run impacts on key macroeconomic and financial variables following increases in the minimum required capital and liquidity ratios. The results indicate that, while long-run effects on bank loans, lending spreads, investment, and output are modest, the short-run effects are non-negligible. In addition, the time horizon for implementing the regulatory changes and the response of monetary policy substantially affect the macroeconomic outcomes. Finally, increasing the required bank capital ratio in other economies roughly doubles the size and duration of the economic downturn in Canada, compared to the case where the increase is implemented only in the Canadian banking sector.Financial institutions; Economic models; Financial stability; International topics

Countercyclical bank capital requirement and optimized monetary policy rules

Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target