Conflict, social unrest and policy uncertainty measures are useful for macroeconomic forecasting
It is widely accepted that episodes of social unrest, conflict, political tensions and policy uncertainty affect the economy. Nevertheless, the real-time dimension of such relationships is less studied, and it remains unclear how to incorporate them in a forecasting framework. This can be partly explained by a certain divide between the economic and political science contributions in this area, as well as the traditional lack of availability of high-frequency indicators measuring such phenomena. The latter constraint, though, is becoming less of a limiting factor through the production of text-based indicators. In this paper we assemble a dataset of such monthly measures of what we call “institutional instability”, for three representative emerging market economies: Brazil, Colombia and Mexico. We then forecast quarterly GDP by adding these new variables to a standard macro-forecasting model in a mixed-frequency MIDAS framework. Our results strongly suggest that capturing institutional instability above a broad set of standard high-frequency indicators is useful when forecasting quarterly GDP. We also analyse relative strengths and weaknesses of the approach.
This research came out of a research collaboration with the Spanish Central Bank and demonstrates the usefulness of conflict forecasts as we provide them on conflictforecast.org for macroeconomic forecasting. My personal takeaway from this project is that the developmental effect of political violence is so large that a forecast of political violence also becomes a forecast of GDP. This forecast is particularly relevant for longer forecast horizons.
An unpublished version of the manuscript can be downloaded here.