A CLI for a small transition economy – the case of Croatia

1. A CLI for a small transition economy – the case of Croatia Amina Ahec-Sonje Katarina Bacic

2. Presentation will consist of… • Explanation of what the Croatian composite prognostic index is … • How the system’s reference series was chosen • What methods were used to develop/review the Croatian composite prognostic index • How the prognostic index is computed and interpreted • Finalremarks and future directions/tasks A CLI for a small transition economy > the case of Croatia

3. CROatian LEading Indicator (CROLEI) today • average lead time is 5,7 months • calculated on monthly basis • record in forecasting turning points in the Croatian business cycle:1995 – 2 mths. ; 1998 – 4 mths.; • 1999 - 3 mths.; 2002 - 8 mths. (link) • 11 components: • -monetary and financial (5) • -real (4) • -fiscal (1) • -external trade (1) A CLI for a small transition economy > the case of Croatia

4. Development of CROLEI • NBER methodology applied in 1993/94, first published in 1995 • Main obstacle> time series > short, with breaks, frequent revisions • Prognostic system with identified lead, lag and coincident indicators • Methodological revision of the system every 2 yrs. • Importance of a meticulously run database, 104 time series in 2004 PROCESS׃ • Identifying reference series > volume of industrial production • Adjusting series for inflation and seasonal adjustment • "SCORING “ method • Calculation of the index A CLI for a small transition economy > the case of Croatia

5. Best option >GDP unsuitable because of Q. basis Second best choice >ind. production index, moth. Basis Industry overlaps with GDP, both as seasonally adj. series and in trend/cycles One shortcoming > represents only 28% of TVA Reference series: INDUSTRIAL PRODUCTION A CLI for a small transition economy > the case of Croatia

6. 2. GRAPHIC AND SCORING method GRAPHIC METHOD> • graphically comparing potential indicators against industrial trend-cycle • Results in a list of coincident indicators, leads and lags • Subjective evaluation, complemented with objective… SCORING METHOD> N=25 • Evaluation and analysis of the role & quality of series • Follows NBER methodology, except in one step • Series are scored according to their> • Economic significance 20% • Statistical adequacy 20% • Economic significance of the link with the ref. series 30% • Smoothness 20% • Currency of statistics10% A CLI for a small transition economy > the case of Croatia

7. …HOW WE SCORED SERIES… 1. Score of economic significance > key activities in the cyclical eco. process 2. Statistical adequacy > the quality of statistical methods of collecting data 3. Economic significance of the link with the ref. series > instead of the conformity to the business cycle, we use bi-variate Granger causality test (Auerbach, 1982): H: Leading indicator does not Granger cause CROLEI (ß=0) if H is rejected(ß≠0), then series are possible LI and R2 is used for scoring 4. Score of smoothness > seasonal ARIMA models and the measure MCD-months for cyclical dominance 5. Currency of statistics > promptness of data and data availability A CLI for a small transition economy > the case of Croatia

8. SCORES AND THE SELECTION OF COMPONENTS Narrower selection of leads is founded on 4 requirements: • a non dominant, ignorable irregular component; • high total score, with 70 points as a threshold for entering the index; • long enough lead time, starting from t-4; • priority is given to economic aggregates (plus to be careful that series that are representatives of the same activity, but on a different degree of aggregation do not enter the index) A CLI for a small transition economy > the case of Croatia

9. RESULTS • 25 indicators scored with scores ranging from 46 to 92 points • 13 series that have traditionally shown to be good indicators kept their good scores / again are eligible • 11 components chosen following the principle of wide/complete coverage of different areas an economy A CLI for a small transition economy > the case of Croatia

10. Scores and significance weights A CLI for a small transition economy > the case of Croatia

11. Computation of the CROLEI • computed by following the NBER/BEA instructions (BEA/USDC, 1977; Zarnowitz i Boschan, 1975; Gapinski, 1982; Shiskin, 1961) that consist of five methodological steps and those are: - Computing symmetric (Shiskin’s) percentage changes; - Standardization of the amplitude; - Weighting of the standardized changes; - Standardization of Rt • Turning monthly changes into the index RESULT: a prognostic expression that may be seen as a weighted average of the chosen leads A CLI for a small transition economy > the case of Croatia

12. Interpretation of the CROLEI Few types of interpretation> Vaccara and Zarnowitz (1977) : consecutive three falls/rises (first difference between current and the previous month) in the composite index value signals a recession/recovery of the total economic activity Stekler and Schepsman (1973): 4 month fall (or rise) below/above the last lowest/highest point in the index to be considered as an interpretation criterion for turns Additional measure - the diffusion index complements the interpretation of the prognostic expression. Its value may fall into three possible ranges: • 0 – 50 range> a recession or a fall; • 50 – 75 range> a moderate growth • 75 – 100 range> an acceleration or an expansion A CLI for a small transition economy > the case of Croatia

13. CONCLUSION • Construction of CROLEI follows the original NBER method to the extent that it is possible • Throughout the revisions of CROLEI, results of the graphic and scoring procedure remain consistent in that the same series obtain good scores (list) • In the modified step in the scoring procedure, we follow recommendations on what to do from the economic literature – result: CROLEI predicts movement of the reference series and not only its turns • Revised CROLEI indices appear to have a very similar cyclical pattern to the old CROELI despite the introduction of some new components (figure) • The new CROLEI contains several series that were already a part of the old indicesShorter lead time does not imply a loss in the prognostic power (list) • Quality of the index improves with every new revision because of the introduction new series in the database and because time series are getting longer A CLI for a small transition economy > the case of Croatia

14. Future directions and tasks • A new revision of CROLEI is due in 2007 • Priority will be given to determining turns in a business cycle using a scientific method instead of only using subjective evaluation • Carefully monitoring when the moment will be right for applying all of the original steps of the barometric method • In due time developing prognostic indices for the Croatian regions A CLI for a small transition economy > the case of Croatia

15. CROLEI from 1999 and CROLEI from 2004 A CLI for a small transition economy > the case of Croatia

16. 13 persistent leads • Employed with the help of the Croatian Employment Agency during a month • Users of unemployment compensation • Nominal net wage per employee • Tourist nights, total • Foreign tourist nights, total • Retail trade, real • Unconsolidated revenues of state, county and municipal budgets • Broadest money M4 • Reserve money • Money M1 • Money M1a • Deposit Money Banks’ Claims • State budget expenditures, total (return) A CLI for a small transition economy > the case of Croatia

17. 6 series that appear in CROLEI from ’99 and from ‘04 • Employed with the help of the Cro. Employment Agency during a month • Tourist nights, total • Retail trade, real • Unconsolidated revenues of state, county and municipal budgets • Broadest money M4 • Time and Sav. Deposits with Dep. Money Banks A CLI for a small transition economy > the case of Croatia

18. CROLEI and INDUSTRY 1/95-7/04 (link)2000=100 A CLI for a small transition economy > the case of Croatia