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Revisions analysis of OECD composite leading indicators (CLI)

Revisions analysis of OECD composite leading indicators (CLI). Third Joint European Commission OECD Workshop on Business and Consumer Tendency Surveys. Emmanuelle Guidetti. Introduction

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Revisions analysis of OECD composite leading indicators (CLI)

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  1. Revisions analysis of OECD composite leading indicators (CLI) Third Joint European Commission OECD Workshop on Business and Consumer Tendency Surveys Emmanuelle Guidetti

  2. Introduction A leading indicator is a statistic that signals the movements, up and down, of future economic activity before they occur, and it may also give some indication of the magnitude of those movements. What is the purpose of the OECD CLI? How is the OECD CLI constructed? What is the current period performance of the CLI?

  3. What is the purpose of the OECD CLI?

  4. Periodicity Transformation (monthly basis) Selection of Reference series Selection of components series PAT box (de-trending the series) Weighting Normalisation (cyclical amplitude homogenised) Smoothing (reduce irregularity) Presentation of CLI - Amplitude adjustment (refers to the deviation from the long-term trend of the series and focuses on the cyclical behaviour of the indicator) - Trend restoration (gives information about the likely rate and amplitude of changes) - Six months rate of change(is less volatile and provides earlier and clearer signals for future turning points than the CLI itself.) Aggregation into a single indicator (the minimum % of component series required is 60%) How is the OECD CLI constructed?

  5. What is the current performance of the CLI? • The aim of the current analysis on CLIs is to evaluate the quality of the indicator when they are first released in order to: • identify areas where their reliability could be improved • provide further information to users on their use for economic analyses.

  6. Why do we have revisions? • Timeliness/availability • Frequency • Smoothness • Other factors

  7. Size of revisions • Revision: Rt=Lt-Pt

  8. Size of revisions over time

  9. Assessment of bias

  10. Reliability of 1st estimate as a signal of short-term expansion or slowdown in economic activity • First measure is the sign of the movements • around 90% of the time, for almost of the countries, the sign of the initial estimates of year-on-year growth rates are the same as those published one month later. This ratio becomes 95% while talking about zone aggregates. • Second measure is the acceleration/deceleration test • Around 80% of the time, for around 40% of the countries, the first estimate of year-on-year growth rates signals no difference in direction with the 2nd estimates. This ratio becomes almost 90% while talking about zone aggregates.

  11. Reliability of 1st estimate to provide early signals of turning points in economic activity

  12. Reliability of 1st estimate to provide early signals of turning points in economic activity

  13. Conclusion • 1st releases of CLI are revised frequently but the size is rather small for most countries and negligible for aggregates. • No evidence of bias • Improvement in the reliability of the 2nd estimates • 1st and 2nd estimates of year-on-year growth rates give reliable signals of approaching cyclical turning points • It is not enough to have timely components they also need to be smooth to guarantee small revisions. This further reinforces the argument that smoothness is probably the most important factor explaining revisions to the OECD CLI.

  14. Investigation on the importance of smoothness of the component series in the size of revisions of CLI

  15. Investigation on the importance of smoothness of the component series in the size of revisions of CLI Business or consumer tendency component with MCD of 4 or 5 or 6

  16. Investigation on the importance of smoothness of the component series in the size of revisions of CLI • The correlation coefficient between smoothness and mean absolute revision of first estimates of the CLIs is rather good and equals to 0.54.The link is even stronger for second estimates of the CLIs with an extremely high correlation coefficient of 0.82. • The general pattern seems to be: the higher the MCD value the higher the mean absolute revision.

  17. Investigation on the importance of smoothness of the component series in the size of revisions of CLI • The revision analysis on Irish CLI components shows the following: R2=0.89

  18. Investigation on the importance of smoothness of the component series in the size of revisions of CLI • The revision analysis on German CLI components is: R2=0. 94

  19. Investigation on the importance of smoothness of the component series in the size of revisions of CLI • If we plot together Irish and German results we can get the following graph: R2=0. 85

  20. END

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