Introducing the Euro Area‐wide Leading Indicator (ALI): Real‐Time Signals of Turning Points in the Growth Cycle from 2007 to 2011

Bondt, G.J. de; Hahn, Elke

doi:10.1002/for.2273

Cited by 6 publications

(5 citation statements)

References 36 publications

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“…The average lead times for the indexes were 4.7 to 7.5 months, but varied over time. The lead time compares well with the lead times reported for Euro Area-wide leading indicators showing 7 (0-21) months for peaks and 6 (2-24) months for troughs (De Bondt and Hahn 2014). The unemployment index had the longest lead time, giving the observers the longest warning time for changes in the business cycle and the longest period for assessing, and smoothing, the index.…”

Section: Cycle Times and Leading Timessupporting

confidence: 73%

Comparing Sentiment- and Behavioral-Based Leading Indexes for Industrial Production: When Does Each Fail?

2019

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We apply a relatively novel leading-lagging (LL) method to four leading and one lagging indexes for industrial production (IP) in Germany. We obtain three sets of results. First, we show that the sentiment-based ifo index performs best in predicting the general changes in IP (−0.596, range −1.0 to 1.0, −1.0 being best). The ZEW index is very close (−0.583). In third place comes, somewhat unexpectedly, the behavioral-based unemployment index (−0.564), and last comes order flow, OF (−0.186). Second, we applied the LL method to predefined recession and recovery time windows. The recessions were best predicted (−0.70), the recoveries worst (−0.32), and the overall prediction was intermediate (−0.48). Third, the method identifies time windows automatically, even for short time windows, where the leading indexes fail. All indexes scored low during time windows around 1997 and 2005. Both periods correspond to anomalous periods in the German economy. The 1997 period coincides with "the great moderation" in the US at the end of a minor depression in Germany. Around 2005, oil prices increased from $10 to $60 a barrel. There were few orders, and monetary supply was low. Our policy implications suggest that the ZEW index performs best (including recessions and recoveries), but unemployment and monetary supply should probably be given more weight in sentiment forecasting.Economies 2019, 7, 104 2 of 18 increases or decreases in forecasting skill. The present study addresses the first of these modes. The LL method is not itself a forecasting method.We examine three leading indexes and one coinciding/lagging index to Industrial production (IP) with respect to their LL relations. Sentiment-based indexes are frequently used as a forecasting device for the economy in the popular press that deals with economic issues, e.g., CNNmoney (2018) and FinancialTimes (2018). The ifo business climate index is a survey-based sentiment index for Germany from the ifo institute for economic research (IFO 2016). The ZEW business cycle index is from the ZEW (Centre for European Economic Research) (ZEW 2016). The third index is a series for "order flow" (OF) that we interpreted as a behavioral-based index. The fourth index is the standard unemployment index (UE), which is a coinciding/lagging index to IP (Enders 2010;Heij et al. 2011;Balcilar et al. 2013). The LL method can be applied to any pairs comprised of candidate leading time series and target time series, e.g., to update composite leading indicators (Abberger et al. 2018).In the present application, we calculate rolling average LL strength over three observations, and then over a longer time window (9 to 13 observations) to obtain a significance measure. By doing this, we can identify time windows where LL strength becomes weaker or stronger, or changes sign. This is a novel feature of the LL method compared to earlier applications.

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Section: Cycle Times and Leading Timessupporting

confidence: 73%

Comparing Sentiment- and Behavioral-Based Leading Indexes for Industrial Production: When Does Each Fail?

2019

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“…The selection of the series for the CLI is, hence, conducted in terms of the standardised cycles of the candidate leading series vis-à-vis the reference cycle. A general-to-specific selection procedure based upon three main criteria to identify the best leading series is followed as it is done with respect to the euro area business cycle leading indicator in de Bondt and Hahn (2014). These selection criteria are applied group by group starting with the series that are available over the longest period.…”

Section: Area-wide Leading Inflation Cycle Indicator (Alice)mentioning

confidence: 99%

“…That is, prior to combining the series together, all series are shifted according to their average optimal lead time and series with negative correlation coefficients are multiplied by -1 to induce a positive relationship with the reference cycle. The selected series are combined together into a CLI by taking a simple average as it is usually done in the related literature (Gibson and Lazaretou, 2001;Binner et al, 2005;de Bondt and Hahn, 2014).…”

Section: Area-wide Leading Inflation Cycle Indicator (Alice)mentioning

confidence: 99%

ALICE: A New InflationMonitoring Tool

2018

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This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators for headline and core inflation in the euro area. The main aim of the two leading indicators is to provide early signals about turning points in inflation. The applied methodology follows that of traditional composite leading indicators and the underlying indicators are carefully selected from a large dataset. An asymmetric band pass filter is used to extract the cyclical components of the time series. Nine series are selected for the headline ALICE with an effective lead time of 3 months.The core ALICE includes seven series and is designed to effectively lead the reference cycle by 5 months. Extensions of these indicators increase the effective lead times to 6 and 9 months, respectively. Both indicators identify main turning points in the inflation cycle ex post and they also perform well in a pseudo real-time exercise. ALICE performs better than other forecasts in terms of forecasting the direction of future inflation developments. In terms of quantitative forecast accurracy, random walk forecasts often performed better than ALICE but that was over some periods less clearly the case for forecasts from private and public sector organisations.

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“…The TCB LI uses standardized factors as component weights in the construction of the index that are updated ‘ to incorporate any data revisions that occurred in the preceding twelve months ’ (TCB, ). Needless to mention, at any revision a change in the dynamics of the entire LI time series is observed (de Bondt and Hahn, , fig. 3).…”

Section: Introductionmentioning

confidence: 99%

“…While there have been many attempts to capture the swings in the US real economic activity, the number of existing leading indicators (LIs) focusing directly and exclusively on the European economy is rather small. Among others, the most popular indicators are: (i) the EU LI released by the OECD (Gyomai and Guidetti, ); (ii) the Conference Board LI for the Euro Area (TCB, ; Ozyildirim et al, ); and (iii) the Aggregate EU Leading Indicator (ALI) developed by de Bondt and Hahn (). However, these LIs, which are currently widely used by policymakers, practitioners and statistical warehouses, have a common drawback.…”

Section: Introductionmentioning

confidence: 99%

A Quasi Real‐Time Leading Indicator for the EU Industrial Production

Donadelli

Paradiso²,

Riedel

2018

The Manchester School

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We build a quasi‐real‐time leading indicator (LI) for the EU industrial production (EU IP). Differently from previous studies, the technique developed in this paper gives rise to an ex‐ante LI that is immune to ex‐post revisions in constituent variables and, thus, does not suffer from overlapping information drawbacks. Moreover, the set of variables used to construct the LI relies on a two‐step dynamic and systematic statistical procedure. This approach ensures that the choice of the variables is not driven by subjective views. Our LI anticipates—on average—main recession periods in the EU industrial production by two to three months. If revised, its predictive power improves. Additional empirical analyses show that the proposed LI (i) forecasts the Great Recession period better than the ex‐post LIs proposed by the OECD and the Conference Board, and (ii) captures the interest rate policy pattern rather well.

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Introducing the Euro Area‐wide Leading Indicator (ALI): Real‐Time Signals of Turning Points in the Growth Cycle from 2007 to 2011

Cited by 6 publications

References 36 publications

Comparing Sentiment- and Behavioral-Based Leading Indexes for Industrial Production: When Does Each Fail?

Comparing Sentiment- and Behavioral-Based Leading Indexes for Industrial Production: When Does Each Fail?

ALICE: A New InflationMonitoring Tool

A Quasi Real‐Time Leading Indicator for the EU Industrial Production

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