Guiding through uncertainty: nowcasting the GDP of Croatia

Abstract

This paper addresses the creation of a nowcasting model for economic activity in Croatia. While considering the characteristics of a small, open economy incorporated in a larger economic unit, it emphasises, alongside domestic hard and soft indicators, the importance of using foreign indicators of short-term movements. By comparing factor models, including both the static method of principal components and dynamic methods of quasi-maximum likelihood and two-step estimation approaches, the paper aims to identify a model that accurately describes short-term GDP movements. The results indicate that structural factor extraction from two or three clusters of indicators combined with the simple method of principal components yields the best results. Such timely insights are crucial for decision-making at all levels, especially for fiscal policymakers in a recent entrant to the monetary union.