November 2007

News, Noise, and Estimates of the "True" Unobserved State of the Economy

Dennis J. Fixler and Jeremy J. Nalewaik


Which provides a better estimate of the "true" state of the U.S. economy, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the idiosyncratic variation in each estimate is pure noise, taking greater variability to imply lower reliability. We develop models that relax this assumption, allowing the idiosyncratic variation in the estimates to be partly or pure news; then greater variability may imply higher information content and greater reliability. Based on evidence from revisions, we reject the pure noise assumption for GDI growth, and our results favor placing a higher weight on GDI due to its relatively large idiosyncratic variability. This calls into question the suitability of the pure noise assumption in other contexts, including dynamic factor models.

Full Paper (Screen Reader Version): Revised | Original

Original paper (PDF)

Keywords: GDP, statistical discrepancy, news and noise, signal-to-noise ratios, optimal combination of estimates, business cycles

PDF: Full Paper

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Last Update: October 19, 2020