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Real-time macroeconomic forecasting with leading indicators: An empirical comparison

Christiaan Heij, Dick van Dijk () and Patrick Groenen ()

International Journal of Forecasting, 2011, vol. 27, issue 2, 466-481

Abstract: This paper demonstrates that the Conference Board’s Composite Leading Index (CLI) has significant real-time predictive ability for Industrial Production (IP) growth rates at horizons from one to six months ahead over the period 1989–2009. A popular but unrealistic analysis, which combines real-time data for CLI and final vintage data for IP as predictor variables, obscures the actual predictive content of the CLI, in the sense that in that case, the improvements in forecast accuracy relative to a univariate AR model are not significant. The CLI appears to be less useful for forecasting growth rates of the Conference Board’s Composite Coincident Index (CCI) in real time, as a univariate AR model performs better. This result is mostly due to its disappointing performance during the first five years of the forecast period. The CLI may not be the best way of exploiting the information contained in the underlying individual leading indicator variables. The use of principal components instead of CLI leads to more accurate real-time forecasts for both IP and CCI growth rates.

Keywords: Vintage data; Leading indicators; Forecast evaluation; Recessions; Industrial production; Composite Coincident Index (search for similar items in EconPapers)
Date: 2011
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