Predicting Recessions with Factor Linear Dynamic Harmonic Regressions
Article first published online: 9 MAY 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 32, Issue 6, pages 481–499, September 2013
How to Cite
Bujosa, M., García-Ferrer, A. and de Juan, A. (2013), Predicting Recessions with Factor Linear Dynamic Harmonic Regressions. J. Forecast., 32: 481–499. doi: 10.1002/for.2246
- Issue published online: 26 JUL 2013
- Article first published online: 9 MAY 2013
- Spanish MEC. Grant Number: ECO2009-10287
- linear dynamic harmonic regression;
- leading indicator;
- factor analysis;
- business cycles;
- Spanish economy
We propose a new framework for building composite leading indicators for the Spanish economy using monthly targeted predictors and small-scale dynamic factor models. Our leading indicator index, based on the low-frequency components of four monthly economic variables, is able to predict the onset of the Spanish recessions as well as the gross domestic product (GDP) growth cycles and classical industrial production cycles, both historically and in real time. Also, our leading indicator provides substantial aid in forecasting annual and quarterly GDP growth rates. Using only real data available at the beginning of each forecast period, our indicator one-step-ahead forecasts shows substantial improvements over other alternatives. Copyright © 2013 John Wiley & Sons, Ltd.