Nowcasting World Trade with a Multi-Region Factor Model

This paper presents a nowcasting model for global trade that allows for regional dynamics and spillovers. World trade growth is driven by common global factors but also regional trends. While existing trade nowcasting models have focused on the former, we allow for the latter using a dynamic factor model (DFM) with a multi-factor block structure. By directly modeling global trends, regional variation and spillovers, we improve on the performance of standard trade nowcasting models, particularly periods characterized by regional heterogeneity. A multi-factor regional framework may be particularly advantageous for tracking trade developments in the future given a period changing trade patterns and geo-economic fragmentation. The model also sheds light on trade spillovers and the drivers of news in global trade: Asia, in particular, has notable spillovers to the global and other regional trade cycles.