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Short Term Macro Monitoring: Leading Indicator Construction-Mexico

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  • Stephen Everhart
  • Robert Duval-Hernandez

Abstract

This paper constructs a composite-leading indicator (CLI) to forecast economic activity/business cycles in Mexico. This cycle is the result of deviations of the economy from its long-term trend. Here, a contractionary phase means a decline in the rate of growth of the economy, and not necessarily an absolute decline in economic activity. For this analysis it is necessary to select an indicator of economic activity (usually the Index of Industrial Production, IIP), as well as a group of variables that, when filtered/adjusted construct the CLI that forecasts the reference series. Selection of the components of the leading indicator is based on the forecast efficiency of the series and on their economic significance. Once selected, the relevant variables are aggregated into a single CLI that forecasts the detrended IIP. For detrending the series, the Hodrick-Prescott (HP) Filter method is applied. This method is a smoothing technique that decomposes seasonal adjusted series into cyclical and trend components. One of the advantages of the HP Filter is that provides a reasonable estimate of the long-term trend of a series.

Suggested Citation

  • Stephen Everhart & Robert Duval-Hernandez, 2001. "Short Term Macro Monitoring: Leading Indicator Construction-Mexico," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0108, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper0108
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    File URL: http://icepp.gsu.edu/files/2015/03/ispwp0108.pdf
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    References listed on IDEAS

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    1. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, October.
    2. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1, National Bureau of Economic Research, Inc.
    3. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, October.
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    Cited by:

    1. Wong, Shirly Siew-Ling & Puah, Chin-Hong & Abu Mansor, Shazali & Liew, Venus Khim-Sen, 2012. "Early warning indicator of economic vulnerability," MPRA Paper 39944, University Library of Munich, Germany.
    2. Wong, Shirly Siew-Ling & Abu Mansor, Shazali & Puah, Chin-Hong & Liew, Venus Khim-Sen, 2012. "Forecasting malaysian business cycle movement: empirical evidence from composite leading indicator," MPRA Paper 36649, University Library of Munich, Germany.

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