New Eurocoin: Tracking Economic Growth in Real Time
Bank of Italy
Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)
University of Rome I - Faculty of Statistics - Department of Economic Sciences; Einaudi Institute for Economics and Finance (EIEF)
Brevan Howard Asset Management LLP
Bank of Italy
Bank of Italy Temi di Discussione (Working Paper) No. 631
This paper presents ideas and methods underlying the construction of an indicator that tracks the euro area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from short-run dynamics. Removal of short-run dynamics from a time series, to isolate the medium to long-run component, can be obtained by a band-pass filter. However, it is well known that band-pass filters, being two-sided, perform very poorly at the end of the sample. New Eurocoin is an estimator of the medium to long-run component of the GDP that only uses contemporaneous values of a large panel of macroeconomic time series, so that no end-of-sample deterioration occurs. Moreover, as our dataset is monthly, New Eurocoin can be updated each month and with a very short delay. Our method is based on generalized principal components that are designed to use leading variables in the dataset as proxies for future values of the GDP growth. As the medium to long-run component of the GDP is observable, although with delay, the performance of New Eurocoin at the end of the sample can be measured.
Number of Pages in PDF File: 44
Keywords: coincident indicator, band-pass filter, large-dataset factor models, generalized principal components
JEL Classification: C51, E32, O30
Date posted: August 13, 2007
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