Coincident and Leading Indicators for the Euro Area

This paper proposes a new way to compute a coincident and a leading indicator of economic activity. Our methodology, based on Forni, Hallin, Lippi and Reichlin (2000), reconciles dynamic principal components analysis with dynamic factor analysis. It allows us to extract indicators from a large panel of economic variables (many variables for many countries). The procedure is used to estimate coincident and leading indicators for the EURO area. Unlike other methods used in the literature, the procedure takes into consideration the cross-country as well as the within-country correlation structure and exploit all information on dynamic cross-correlation.