The Composite Leading Indicator of the Slovak Republic Business Cycle: Construction and Forecast
The Composite Leading Indicator of the Slovak Republic Business Cycle: Construction and Forecast

Summary/Abstract: Business cycle indicators (BCIs) convert complex economic dynamics into one-dimensional figures that are easily tractable. Although those indicators are effective in the ex post description of cycles, the main strength of indicators lies in forecasting. Constructing BCIs has become a technical industry. Over the years the methodology has not changed fundamentally though. The system of leading, coincident and lagging indicators, which we apply in the construction of our BCI, is developed at the National Bureau of Economic Research (NBER) in the USA in the 1930s. For recent advances in the field of leading indicators one may con-sult Lahiri and Moore (1991), Zarnowitz (1992) and Stock and Watson (1993). A natural question is why one would like to construct a business cycle indica-tor, and especially why one would like to construct a BCI for the Slovak Repub-lic? To answer the first question, we believe that a home-made BCI is an indis-pensable tool for a macroeconometric research group: it complements macroeco-nomic policy analyses using large-scale models, which by their nature cannot be adapted to new information quickly. The second question is a bit more difficult to answer because the Slovak Republic has just passed a period of disintegration of the Comecon and the first phase of radical economic reform following that period. Nevertheless, we think it is useful to make a BCI for the Slovak Republic despite the fact that the available data cover a short time span and are dominated by con-sequences of the economic reform the country is in. The reason is that, perhaps especially for countries in phases of transformation, policy makers may be inter-ested to learn what the consequences of their policy will be for the near future. BCIs by their nature can provide this information very quickly.

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