An observation regarding Hamilton’s recent criticisms of Kilian’s global real economic activity index

Abstract

Hamilton (2019) offers several criticisms of the global real economic activity (REA) index suggested in Kilian (2009). This study deals with Hamilton (2019)’s arguments regarding the ability of the index to forecast commodity prices. Using in-sample population-level predictability tests, Hamilton (2019) argues that world industrial production index growth rate performs better than Kilian’s REA Index. We show that from an out-of-sample population-level predictability perspective, the REA index performs just as well if not better than world industrial production index. The Clark and West (2007) no population-level predictability null hypothesis is rejected at the same rate if not higher for the REA index, especially as the forecast horizon increases.