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Predicting recessions and recoveries in real time: The euro area-wide leading indicator (ALI)

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  • de Bondt, Gabe
  • Hahn, Elke
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    Abstract

    This study develops a new monthly euro Area‐wide Leading Indicator (ALI) for the euro area business cycle. It derives the composite ALI by applying a deviation cycle methodology with a one‐sided band pass filter and choosing nine leading series. Our main findings are that i) the applied monthly reference business cycle indicator (BCI) derived from industrial production excluding construction is close to identical to the real GDP cycle, ii) the ALI reliably leads the BCI by 6 months and iii) the longer leading components of the ALI are good predictors of the ALI and therefore the BCI up to almost a year ahead and satisfactory predictors by up to 2 years ahead. A real‐time analysis for predicting the euro business cycle during the 2008/2009 recession and following recovery confirms these findings. JEL Classification: E32

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 1246.

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    Date of creation: Sep 2010
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    Handle: RePEc:ecb:ecbwps:20101246

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    Related research

    Keywords: business cycle; Deviation cycle; euro area; Leading Indicator; Real‐time analysis;

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    1. Professor E. Philip Davis, 2001. "Some evidence on financial factors in the determination of aggregate business investment for the G7," NIESR Discussion Papers 155, National Institute of Economic and Social Research.
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    Cited by:
    1. Buchmann, Marco, 2011. "Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession," Working Paper Series 1286, European Central Bank.

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