Abstract
Given the role of monetary changes in explaining business cycles, a challenge for regional analysts is to integrate monetary processes into leading indicator models. This paper examines economic processes imbedded in regional models and analyzes changes in forecasting performance when a national monetary indicator is integrated into these models. Performance of the models, with and without the monetary variable, is examined with respect to turning points, volatility, false signals, and quantitative forecasts. The results show that integrating a national monetary indicator into the regional models of leading indicators is conceptually sound as well as empirically promising, and may contribute to the information content imbedded in this class of models.
Highlights
This paper reports observations on a class of forecasting models referred to as regional composite indexes of leading indicators
While the primary forecasting objective seems to have been met by early signals emanating from these indexes, their explanatory power is less certain because of the rather narrow set of economic processes imbedded in the models
In order to assess how these regional models are progressing, this paper examines the processes imbedded in the models and analyzes changes in forecasting performance when a national monetary indicator is integrated into some of the models
Summary
This paper reports observations on a class of forecasting models referred to as regional composite indexes of leading indicators. Individual leading economic indicators are used extensively to forecast shifts in the cyclical phase of national as well as regional economies. Given the role of monetary changes in explaining business cycles, a challenge for regional analysts is to integrate monetary processes into leading indicator models. Integration may improve the empirical performance of the models themselves, and the economic interpretation of cyclical movements in regions. In order to assess how these regional models are progressing, this paper examines the processes imbedded in the models and analyzes changes in forecasting performance when a national monetary indicator is integrated into some of the models. The author would like to thank anonymous referees for helpful comments
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