IDEAS home Printed from https://ideas.repec.org/p/fca/wpfnca/2003-12.html
   My bibliography  Save this paper

New Concident, Leading and Recession Indexes for the Canadian Economy: An Application of the Stock and Watson Methodology

Author

Listed:
  • Yanjun Liu
  • Carl Gaudreault
  • Robert Lamy

Abstract

Using modern econometric techniques, Stock and Watson (1989) developed a new system of composite indexes of coincident and leading economic indicators, as well as a recession index for the United States. We apply this approach to build coincident and leading economic indexes for the Canadian economy. The composite coincident economic index (CEI) is based on an econometric model in which the "state of the economy" is an unobserved variable, which is common to several macroeconomic variables. The model is based on the fact that the fluctuations in these variables share a common element, which can be estimated. The approach to the construction of the composite leading economic index (LEI) is also different from the traditional approach. Rather than constructing a composite index on the basis of a weighted average of leading indicators, we use past changes in the CEI, as well as other variables that have historically led the business cycle, to forecast the change in the CEI over the coming three or six months. If the coincident index truly reflects the state of the economy, then a good forecast of this coincident index should make a good leading index. We also build a recession index for the Canadian economy. Unlike Stock and Watson, who used a rather complicated and tedious procedure, our recession index is the forecast probability that the economy will be in a recession in the coming three or six months based on logit models, using data available through the month of its construction and the constructed LEI. Stock et Watson (1989) ont développé un nouvel ensemble d’indices composites coïncident et avancé, ainsi qu’un indice de récession pour les États-Unis en utilisant des techniques économétriques modernes. Nous appliquons cette approche pour construire des indices coïncident et avancé pour l’économie canadienne. L’indice économique coïncident (CEI) est basé sur un modèle économétrique dans lequel « l’état de l’économie » est une variable non observable commune a plusieurs variables macro-économiques. Le modèle est basé sur le fait que les fluctuations de ces variables partagent un élément commun qui peut être estimé. L’approche pour la construction de l’indice économique avancé (LEI) est également différente de la méthode traditionnelle. Plutôt que de construire un indice composite sur la base d’une moyenne pondérée de plusieurs indicateurs avancés, nous utilisons les variations passées du CEI ainsi que d’autres variables qui ont historiquement devancé le cycle économique pour prévoir les variations du CEI pour les trois ou six mois à venir. Si l’indice économique coïncident reflète réellement l’état de l’économie, alors une bonne prévision de cet indice devrait produire un bon indice économique avancé. Nous construisons également un indice de récession pour l’économie canadienne. Contrairement à Stock et Watson qui utilisent une procédure relativement lourde et complexe, notre indice de récession est une prévision de la probabilité que l’économie se retrouve en récession pour les trois ou six mois à venir, estimée à partir de modèles logit et en utilisant les données disponibles jusqu’au mois de sa construction.

Suggested Citation

  • Yanjun Liu & Carl Gaudreault & Robert Lamy, "undated". "New Concident, Leading and Recession Indexes for the Canadian Economy: An Application of the Stock and Watson Methodology," Working Papers-Department of Finance Canada 2003-12, Department of Finance Canada.
  • Handle: RePEc:fca:wpfnca:2003-12
    as

    Download full text from publisher

    File URL: http://www.fin.gc.ca/scripts/Publication_Request/request2_e.asp?doc=wp2003-12e.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cotrie, Gladys & Craigwell, Roland & Maurin, Alain, 2009. "A review of leading composite indicators: making a case for their use in Caribbean economies," MPRA Paper 33390, University Library of Munich, Germany, revised 2009.
    2. Agne Reklaite, 2011. "Coincident, leading and recession indexes for the Lithuanian economy," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(1), pages 91-108, July.
    3. Agne Reklaite, 2015. "Globalisation Effect Measure Via Hierarchical Dynamic Factor Modelling," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 10(3), pages 139-149, September.
    4. Shikha Gupta & Nand Kumar, 2021. "Dynamics of globalization effect in India," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1394-1406, September.
    5. Lili Hao & Eric C.Y. Ng, 2011. "Predicting Canadian recessions using dynamic probit modelling approaches," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(4), pages 1297-1330, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fca:wpfnca:2003-12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gustavo Durango (email available below). General contact details of provider: https://edirc.repec.org/data/fingvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.