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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

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

Suggested Citation

  • de Bondt, Gabe & Hahn, Elke, 2010. "Predicting recessions and recoveries in real time: The euro area-wide leading indicator (ALI)," Working Paper Series 1246, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101246
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1246.pdf
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    References listed on IDEAS

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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," National Institute of Economic and Social Research (NIESR) Discussion Papers 187, National Institute of Economic and Social Research.
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    Cited by:

    1. Gross, 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.

    More about this item

    Keywords

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

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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