The Predictive Power of the European Economic Sentiment Indicator

15 Pages Posted: 15 Feb 2008

See all articles by Sarah Gelper

Sarah Gelper

KU Leuven - Faculty of Business and Economics (FEB)

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: January 2007

Abstract

Economic sentiment surveys are carried out by all European Union member states on a monthly basis. The survey outcomes are used to obtain early insight into future economic evolutions and often receive extensive press coverage. Based on these surveys, the European Commission constructs an aggregate European Economic Sentiment Indicator (ESI). This paper compares the ESI with more sophisticated aggregation schemes based on two statistical methods: dynamic factor analysis and partial least squares. We compare the aggregate sentiment indicators and the weights used in their construction. Afterwards a comparison of their forecast performance for two real economic series, industrial production growth and unemployment, follows. Our findings are twofold. First it is found that the ESI, although constructed in a rather ad hoc way, can compete with the indicators constructed according to statistical principles. Secondly, the predictive power of the sentiment indicators, as tested for in an out-of sample Granger causality framework, is limited.

Keywords: Common indicators, Dimension reduction methods, Economic sentiment indicator, Forecasting

JEL Classification: C32, C43, E17, E20

Suggested Citation

Gelper, Sarah and Croux, Christophe, The Predictive Power of the European Economic Sentiment Indicator (January 2007). Available at SSRN: https://ssrn.com/abstract=1093637 or http://dx.doi.org/10.2139/ssrn.1093637

Sarah Gelper (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
191
Abstract Views
1,103
rank
157,513
PlumX Metrics