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A General to Specific Approach for Constructing Composite Business Cycle Indicators

Combining economic time series with the aim to obtain an indicator for business cycle analyses is an important issue for policy makers. In this area, econometric techniques usually rely on systems with either a small number of series, N, (VAR or VECM) or, at the other extreme, a very large N (factor models). In this paper we propose tools to select the relevant business cycle indicators in a "medium" N framework, a situation that is likely to be the most frequent in empirical works. An example is provided by our empirical application, in which we study jointly the short-run co-movements of 24 European countries. We show, under not too restrictive conditions, that parsimonious single-equation models can be used to split a set of N countries in three groups. The first group comprises countries that share a synchronous common cycle, a non-synchronous common cycle is present among the countries of the second group, and the third group collects countries that exhibit idiosyncratic cycles. Moreover, we offer a method for constructing a composite coincident indicator that explicitly takes into account the existence of these various forms of short-run co-movements among variables.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 224.

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Length: 19 pages
Date of creation: 27 Feb 2012
Date of revision: 27 Feb 2012
Handle: RePEc:rtv:ceisrp:224
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  1. Gianluca Cubadda & Barbara Guardabascio, 2010. "A Medium-N Approach to Macroeconomic Forecasting," CEIS Research Paper 176, Tor Vergata University, CEIS, revised 09 Dec 2010.
  2. Issler, J.V. & Vahid, F., 2001. "The Missing Link: Using the NBER Recession Indicator to Construct Coincident and Leading Indices of Economic Activity," Monash Econometrics and Business Statistics Working Papers 9/01, Monash University, Department of Econometrics and Business Statistics.
  3. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  4. ZELLNER, Arnold & PALM, Franz, . "Time series analysis and simultaneous equation econometric models," CORE Discussion Papers RP 173, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Altissimo, Filippo & Bassanetti, Antonio & Cristadoro, Riccardo & Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "EuroCOIN: A Real Time Coincident Indicator of the Euro Area Business Cycle," CEPR Discussion Papers 3108, C.E.P.R. Discussion Papers.
  6. Gianluca Cubadda, 2007. "A Reduced Rank Regression Approach to Coincident and Leading Indexes Building," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 271-292, 04.
  7. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  8. Forni, Mario, et al, 2001. "Coincident and Leading Indicators for the Euro Area," Economic Journal, Royal Economic Society, vol. 111(471), pages C62-85, May.
  9. Carlos Santos & David Hendry & Soren Johansen, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, vol. 23(2), pages 317-335, April.
  10. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  11. Centoni, Marco & Cubadda, Gianluca & Hecq, Alain, 2007. "Common shocks, common dynamics, and the international business cycle," Economic Modelling, Elsevier, vol. 24(1), pages 149-166, January.
  12. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  13. Julia Campos & Neil R. Ericsson & David F. Hendry, 2005. "General-to-specific modeling: an overview and selected bibliography," International Finance Discussion Papers 838, Board of Governors of the Federal Reserve System (U.S.).
  14. repec:fgv:epgrbe:v:47:n:2:a:1 is not listed on IDEAS
  15. Alain Hecq, 2005. "Should we really care about building business cycle coincident indexes!," Applied Economics Letters, Taylor & Francis Journals, vol. 12(3), pages 141-144.
  16. Gianluca Cubadda & Alain Hecq, 2011. "Testing for common autocorrelation in data‐rich environments," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(3), pages 325-335, April.
  17. Jakob de Haan & Robert Inklaar & Richard Jong-A-Pin, 2008. "Will Business Cycles In The Euro Area Converge? A Critical Survey Of Empirical Research," Journal of Economic Surveys, Wiley Blackwell, vol. 22(2), pages 234-273, 04.
  18. Gianluca Cubadda, 2007. "A Unifying Framework for Analysing Common Cyclical Features in Cointegrated Time Series," CEIS Research Paper 102, Tor Vergata University, CEIS.
  19. Cubadda, Gianluca & Hecq, Alain, 2001. "On non-contemporaneous short-run co-movements," Economics Letters, Elsevier, vol. 73(3), pages 389-397, December.
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