Working Paper: CEPR ID: DP4977
Authors: Massimiliano Marcellino
Abstract: We provide a summary updated guide for the construction, use and evaluation of leading indicators, and an assessment of the most relevant recent developments in this field of economic forecasting. To begin with, we analyse the problem of selecting a target coincident variable for the leading indicators, which requires coincident indicator selection, construction of composite coincident indexes, choice of filtering methods, and business cycle dating procedures to transform the continuous target into a binary expansion/recession indicator. Next, we deal with criteria for choosing good leading indicators, and simple non-model based methods to combine them into composite indexes. Then, we examine models and methods to transform the leading indicators into forecasts of the target variable. Finally, we consider the evaluation of the resulting leading indicator based forecasts, and review the recent literature on the forecasting performance of leading indicators.
Keywords: business cycles; coincident indicators; forecasting; leading indicators; turning points
JEL Codes: C53; E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Leading indicators (E32) | Economic activity (E29) |
| Financial indicators (G32) | Economic conditions (E66) |
| Composite leading indexes (C43) | Predictive power regarding future economic states (E27) |
| Leading indicators (E32) | Turning points in economic activity (E32) |
| Leading indicators (E32) | State of the economy (E66) |