Do Sentiment Indicators Help to Assess and Predict Actual Developments of the Chinese Economy?

26 Pages Posted: 19 Jul 2007

See all articles by Aaron N. Mehrotra

Aaron N. Mehrotra

Bank for International Settlements (BIS)

Jouko Rautava

Bank of Finland - Institute for Economies in Transition (BOFIT)

Date Written: April 26, 2007

Abstract

This paper evaluates the usefulness of business sentiment indicators for forecasting developments in the Chinese real economy. We use data on diffusion indices collected by the People's Bank of China for forecasting industrial production, retail sales and exports. Our bivariate vector autoregressive models, each composed of one diffusion index and one real sector variable, generally outperform univariate AR models in forecasting one to four quarters ahead. Similarly, principal components analysis, combining information from various diffusion indices, leads to enhanced forecasting performance. Our results indicate that Chinese business sentiment indicators convey useful information about current and future developments in the real economy. They also suggest that the official data provide a fairly accurate picture of the Chinese economy.

Keywords: forecasting, diffusion index, VAR, China

JEL Classification: E32, E37, P27

Suggested Citation

Mehrotra, Aaron N. and Rautava, Jouko, Do Sentiment Indicators Help to Assess and Predict Actual Developments of the Chinese Economy? (April 26, 2007). BOFIT Discussion Paper No. 11/2007, Available at SSRN: https://ssrn.com/abstract=1001614 or http://dx.doi.org/10.2139/ssrn.1001614

Aaron N. Mehrotra (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Jouko Rautava

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

PO Box 160
Helsinki FI-00101
Finland
+358 10 831 2280 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/rautava_jouko/

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