DP5633 New EuroCOIN: Tracking Economic Growth in Real Time

Author(s): Filippo Altissimo, Riccardo Cristadoro, Mario Forni, Marco Lippi, Giovanni Veronese
Publication Date: April 2006
Date Revised: June 2007
Keyword(s): band-pass filter, coincident index, generalized principal components, large dataset factor models
JEL(s): C51, E32, O30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5633

This paper presents ideas and methods underlying the construction of an indicator that tracks euro area GDP growth but, unlike GDP growth, (i) is updated monthly and almost in real time, and (ii) is free from short-run dynamics. Removal of short-run dynamics from a time series to isolate the medium to long-run component can be obtained by a band-pass filter. However, it is well known that band-pass filters, being two-sided, perform very poorly at the end of the sample. New EuroCOIN is an estimator of the medium to long-run component of GDP that only uses contemporaneous values of a large panel of macroeconomic time series, so that no end-of-sample deterioration occurs. Moreover, as our dataset is monthly, New EuroCOIN can be updated each month and with a very short delay. Our method is based on generalized principal components that are designed to use leading variables in the dataset as proxies for future values of GDP growth. As the medium to long-run component of GDP is observable, although with delay, the performance of New EuroCOIN at the end of the sample can be measured.