332 A DYNAMIC FACTOR MODEL OF QUARTERLY REAL GROSS DOMESTIC PRODUCT GROWTH IN THE CARIBBEAN: THE CASE OF CUBA AND THE BAHAMAS Philip Liu and Rafael Romeu 1 Real output growth is a central economic indicator for all policy makers. It defines the business cycle, es- tablishes the timing of recessions, and largely drives discretionary fiscal and monetary policy decisions. The lack of timely reporting of quarterly GDP in some countries presents difficulties in the assessment of current economic conditions, and has fomented a growing literature that “nowcasts” GDP at higher (monthly) frequencies and anticipates quarterly data releases. 2 While increasingly rare among emerging market economies, many countries do not report quarterly GDP growth at all—a number of these cas- es are found in the Caribbean, and the availability of timely indicators of economic activity is even more important for policy makers in these economies. This study proposes a framework that combines nowcast- ing econometric techniques with data that takes ad- vantage of the geographic characteristics of Caribbe- an economies to estimate quarterly GDP growth rates. Caribbean economies exhibit a number of character- istics that aid the statistical inference of their quarter- ly output growth. First, as islands, commercial ship- ping dominates the transport of their external trade in goods, hence providing more accurate and timely measures of trade than overland routes for other countries. Second, external trade tends to reflect a large proportion of internal consumption and invest- ment, as these economies are relatively small and spe- cialized, and hence they import a large part of their consumption basket and investment goods. Thus trade generally mirrors economic activity in the wid- er economy. Third, their geographic proximity to the U.S. and various trade treaties implies that most of their trade is with the United States, and to a lesser extent the EU and China, all of which publish accu- rate and timely bilateral trade data. Fourth, one of their dominant industries is tourism, for which at least summary statistics are accurately measured and published on a timely basis. 3 Moreover, this sector closely links an important part of Caribbean eco- nomic activity to labor conditions in advanced econ- omies, for which there is broad data availability. Fi- nally, idiosyncratic regional exposure to factors such as hurricanes and extreme weather events, advanced economy financial sectors, or remittances, among others, also lends itself to timely measurement and reporting. Among the larger Caribbean economies, many al- ready produce and publish quarterly Gross Domestic 1. International Monetary Fund, Western Hemisphere and Fiscal Affairs Departments, respectively. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. 2. See, for example, Liu, Matheson and Romeu (2010) on nowcasting monthly GDP in Latin America and the Caribbean. 3. See Romeu (2008) on the influence of trade treaties, natural disasters, and tourism for Caribbean economies.