The role of indicator selection in nowcasting Euro-area GDP in pseudo real time

Building on the literature on regularization and dimension reduction methods, the paper presents a quarterly forecasting model for euro-area GDP. The pseudo-real-time nature of the information set is accounted for as the pattern of publication lags is explicitly considered. Forecast evaluation exercises show that predictions obtained through various dimension reduction methods outperform both the benchmark AR and the diffusion index model without preselected indicators. Moreover, forecast combination significantly reduces forecast error.