Chapter 16 Leading Indicators

In this chapter we provide a guide for the construction, use and evaluation of leading indicators, and an assessment of the most relevant recent developments in this field of economic forecasting. To begin with, we analyze the problem of indicator selection, choice of filtering methods, business cycle dating procedures to transform a continuous variable into a binary expansion/recession indicator, and methods for the construction of composite indexes. Next, we examine models and methods to transform the leading indicators into forecasts of the target variable. Finally, we consider the evaluation of the resulting leading indicator based forecasts, and review the recent literature on the forecasting performance of leading indicators.