A Probability Model of The Coincident Economic Indicators

James H. Stock · Mark W. Watson

261 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Unemployment and Economic Growth

Abstract

The Index of Coincident Economic Indicators, currenrly compiled by rhe U.S.Deparrmenr of Commerce, is designed to measure the srate of overall economic activity.The index is constructed as a weighted average of four key macroeconomic time series, where the weights are obtained using rules that dare to the early days of business cycle analysis.This paper presents an explicit rime series model (formally, a dynamic factor analysis or "singleindex" model) rhar implicitly defines a variable that can be thought of as the overall state of the economy.Upon estimating this model using data from 1959-1987, the estimate of this unobserved variable is found to be highly correlated with the official Commerce Department series, particularly over business cycle horizons.Thus this model provides a formal rationalization for the traditional methodology used to develop the Coincident Index.Initial exploratory exercises indicate that traditional leading variables can prove useful in forecasting the short-run growth in this series.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1988Trends and random walks in macroeconomic time series 1977Business Cycle Modeling Without Pretending to Have Too Much A Priori Economic Theory 1946Measuring Business Cycles.1948Measuring Business Cycles.

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2018Remittances, finance and growth: Does financial development foster the impact of remittances on economic growth?199310 Structural time series models 2003Are correlations of stock returns justified by subsequent changes in national outputs?2000Coincident and leading indicators of the stock market 2005The Empirical Risk-Return Relation: A Factor Analysis Approach 1995New index of coincident indicators: A multivariate Markov switching factor model approach

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