Identifying leading indicators of real activity and inflation for Turkey, 1988-2010: A pseudo out-of-sample forecasting approach

This paper develops a set of leading indicators for industrial production growth and changes in consumer price inflation by accounting for changes in the policy regime that have occurred for the Turkish economy over the sample period 1988-2010. The choice of indicators is based on a pseudo out-of-sample forecasting exercise that is implemented by Leigh and Rossi (2002), and Stock and Watson (2003), amongst others. Our findings provide evidence on the factors determining changes in real activity and inflation over an extended sample period that encompasses episodes of volatile inflation and output growth as well as the recent experience of disinflation and normalisation for the Turkish economy. Keywords: Real activity, inflation, leading indicators, out-of-sample forecasting, combination forecasts, inflation targeting, Turkey. JEL classification: E1, E32, E37, E58, F43, O52