Working Paper: CEPR ID: DP13455
Authors: Lutz Kilian
Abstract: Hamilton (2018) suggests that the Kilian (2009) index of global real economic activity is misleading and calls for alternative measures. The problem documented by Hamilton is a consequence of a coding mistake. Specifically, the index of nominal freight rates underlying the Kilian index was accidentally logged twice. Once this coding error is corrected by removing one of the log transformations, none of the concerns raised by Hamilton remains valid and the index may be used as originally intended. Moreover, it can be shown that the corrected index differs only slightly from the original index and that the key empirical results in Kilian (2009) and related studies remain unchanged when replacing the index.
Keywords: global business cycle; shipping; commodity market; oil; log transformation
JEL Codes: Q31; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coding error in Kilian (2009) index (C69) | validity of the index (C43) |
| correction of coding error (C88) | empirical results regarding global oil demand and supply shocks (Q43) |
| correction of coding error (C88) | responses of real prices of oil to shocks (Q31) |
| corrected index (C43) | modeling cyclical variation of the global economy (F47) |