New Eurocoin: Tracking Economic Growth in Real Time

Abstract

This paper presents ideas and methods underlying the construction of a timely coincident index that tracks euro-area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from seasonal and shorter-run dynamics. We take as target the medium- long-run component of the GDP growth, defined in the frequency domain as including only waves of period larger than one year. We estimate the target by projecting it on generalized principal components extracted from a large panel of monthly macroeconomic series. The main contribution of the paper is that current values of our principal components, derived from a dynamic factor model, act as proxies for future values of GDP growth. In this way we improve with respect to the end-of-sample poor estimation which is typical with band-pass filters. Moreover, as it is defined as an estimate of a target which is observable (although with delay), the performance of our index at the end of the sample can be measured.

Keywords: Coincident index, band-pass filter, large dataset factor models, generalized principal components

JEL Classification: C51, E32, O30