1887

OECD Journal: Journal of Business Cycle Measurement and Analysis

The Journal of Business Cycle Measurement and Analysis has been discontinued as of 24 June 2016. This journal was published jointly with CIRET from 2004 to 2015. For more information see www.ciret.org/jbcy.

English

Keywords: business tendency, economic measurement, economic statistics, cyclical indicators, business surveys, business cycles, economic research, business investment, consumer surveys, economic indicators, economic cycle, cyclical fluctuations, short-term, economic analysis

Making leading indicators more leading

A wavelet-based method for the construction of composite leading indexes

This paper proposes a novel wavelet-based approach for constructing composite indicators. The wavelet-based methodology exploits the ability of wavelet analysis to analyse the relationships between variables on a scale-by-scale, rather than aggregate, basis. A wavelet-based index which combines several scale-based subindexes is constructed by using a scale-by-scale selection of the components included in the OECD composite leading indicator (CLI) for the US. The comparison with the CLI and its derived measures indicate that the wavelet-based composite index tends to provide early signals of business cycle turning points well in advance of the OECD CLI. Moreover we find that the reliability of the signals tends to increase considerably when the sub-index obtained from the time scale components corresponding to minor cycles, that is, 2-4 years, is removed from the overall wavelet-based index.

Keywords: wavelets; composite leading indicators; early warning signals

JEL classification: C1; C3; C5; E3

English

JEL: C5: Mathematical and Quantitative Methods / Econometric Modeling; C3: Mathematical and Quantitative Methods / Multiple or Simultaneous Equation Models; Multiple Variables; C1: Mathematical and Quantitative Methods / Econometric and Statistical Methods and Methodology: General; E3: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles
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