A Quasi Real-Time Leading Indicator for the EU Industrial Production

Abstract

We build a quasi real-time leading indicator (LI) for the EU industrial production (IP). Differently from previous studies, the technique developed in this paper gives rise to an ex-ante LI that is immune to “overlapping information drawbacks”. In addition, the set of variables composing the LI relies on a two-steps dynamic and systematic procedure. This ensures that the choice of the variables is not driven by subjective views. Our LI anticipates swings (including the 2007-2008 crisis) in the EU industrial production – on average – by 2 to 3 months. If revised, its predictive power largely improves. Via a couple of standard empirical exercises we show that the proposed LI (i) forecasts crises’ phases better than the ex-post LIs proposed by the OECD and the Conference Board and (ii) captures the interest rate policy pattern rather well.

Keywords: Leading indicator, EU industrial production, Granger causality, Turning points, Forward-looking Taylor rule

JEL Classification: E32, C22, C52