Assessing the forecasting power of the leading composite index in Macedonia

The objective of the paper is to evaluate the forecasting power of the leading composite index of Macedonia. The leading index is a weighted index of indicators which are considered to lead the economic cycle. The main dynamic model in which, first, GDP is represented as autoregressive process, and then lags of the leading index are added, is used to measure the forecasting error behavior with the addition of the leading index and with the imposition of larger time span in the model. The main finding is that the inclusion of the leading index in the model reduces the forecasting error. The forecasting time of the leading composite index in Macedonia is found to be between one and two quarters.