Do Survey Indicators Let Us See the Business Cycle? A Frequency Decomposition

National Bank of Belgium Working Paper No. 131

43 Pages Posted: 3 Oct 2010

See all articles by Luc Dresse

Luc Dresse

National Bank of Belgium

Christophe Van Nieuwenhuyze

National Bank of Belgium

Date Written: March 27, 2008

Abstract

This paper uses a frequency domain approach to gain insight into the correlation between survey indicators and year-on-year GDP growth. Using the Baxter-King filter, we split up each series into three components: a short-term, a business cycle (oscillations between 18 and 96 months) and a long-term component. We then calculate how much of the variation of the survey series and GDP growth can be ascribed to these different components. Finally, we use this information together with an analysis of the correlation between survey indicators and year-on-year GDP growth at the different frequencies to explain their overall correlation. We show that survey indicators, similar to year-on-year GDP growth, do not perfectly reflect business cycle movements but contain cycles of other frequencies. Long-term cycles, in particular, are a nontrivial part of the series' variance. Furthermore, there exist some clear relations between the weight of these cycles in the survey indicators and their correlation with GDP growth. In general, the larger the business cycle component, the larger the correlation, while the opposite is true for the short-term component. The evidence for the long-term component is mixed: although a long-term component seems necessary as the correlation at this frequency is the highest, strong or weak long-term components are typically idiosyncratic, dragging down the overall correlation between the indicator and year-on-year GDP growth. The paper applies this methodology to the euro area countries (EC survey indicators) and to Belgium separately (NBB business survey indicators). The results are highly comparable.

Keywords: Baxter-King, spectral analysis, survey indicators, correlation

JEL Classification: C22, E32

Suggested Citation

Dresse, Luc and Nieuwenhuyze, Christophe Van, Do Survey Indicators Let Us See the Business Cycle? A Frequency Decomposition (March 27, 2008). National Bank of Belgium Working Paper No. 131, Available at SSRN: https://ssrn.com/abstract=1685289 or http://dx.doi.org/10.2139/ssrn.1685289

Luc Dresse (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Christophe Van Nieuwenhuyze

National Bank of Belgium ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

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