DP13455 Measuring Global Real Economic Activity: Do Recent Critiques Hold Up to Scrutiny?

Author(s): Lutz Kilian
Publication Date: January 2019
Keyword(s): Commodity market, Global business cycle, log transformation, Oil, shipping
JEL(s): Q31, Q43
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13455

Hamilton (2018) suggests that the Kilian (2009) index of global real economic activity is misleading and calls for alternative measures. The problem documented by Hamilton is a consequence of a coding mistake. Specifically, the index of nominal freight rates underlying the Kilian index was accidentally logged twice. Once this coding error is corrected by removing one of the log transformations, none of the concerns raised by Hamilton remains valid and the index may be used as originally intended. Moreover, it can be shown that the corrected index differs only slightly from the original index and that the key empirical results in Kilian (2009) and related studies remain unchanged when replacing the index.