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Denoised Least Squares Forecasting of GDP Changes Using Indexes of Consumer and Business Sentiment

Antonis Michis ()

No 2010-9, Working Papers from Central Bank of Cyprus

Abstract: Indexes of consumer and business sentiment are frequently characterized by measurement errors and short-term cyclical fluctuations that can distort their predictive accuracy for GDP changes. While measurement errors arise due to the survey sampling procedures that characterize these surveys, short-term cyclical fluctuations are generally linked with various exogenous and irregular factors that are not necessarily related to the economy. This paper shows, using data on the US economy, that applying wavelet denoising on indexes of consumer and business sentiment in the context of the linear regression model can overcome these limitations and can provide: (a) efficient coefficient estimates in models that explain consumer sentiment index variation; and (b) consistent coefficient estimates and predictions in models for GDP changes when using consumer and business sentiment indexes as predictors.

Keywords: Consumer sentiment index; denoised least squares; index of homebuilders’sentiment; index of manufacturing activity; measurement errors. (search for similar items in EconPapers)
JEL-codes: C43 C53 C82 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2010-10
New Economics Papers: this item is included in nep-for
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Chapter: Denoised least squars forecasting of GDP changes using indexes of consumer and business sentiment (2011) Downloads
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