Short-term forecasts of economic activity: Are fortnightly factors useful?

A short-term mixed-frequency model is proposed to estimate and forecast Italian economic activity fortnightly. We introduce a dynamic one-factor model with three frequencies (quarterly, monthly, and fortnightly) by selecting indicators that show significant coincident and leading properties and are representative of both demand and supply. We conduct an out-of-sample forecasting exercise and compare the prediction errors of our model with those of alternative models that do not include fortnightly indicators. We find that high-frequency indicators significantly improve the real-time forecasts of Italian gross domestic product (GDP); this result suggests that models exploiting the information available at different lags and frequencies provide forecasting gains beyond those based on monthly variables alone. Moreover, the model provides a new fortnightly indicator of GDP, consistent with the official quarterly series.