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

  • de Bondt, Gabe
  • Hahn, Elke

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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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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  1. Professor E. Philip Davis, 2001. "Some evidence on financial factors in the determination of aggregate business investment for the G7," NIESR Discussion Papers 187, National Institute of Economic and Social Research.
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