No. 104. A COINCIDENT ECONOMIC INDICATOR OF ECONOMIC ACTIVITY IN GREECE
E. Tsouma. 2009.
In the USA and other advanced economies, it has long been a tradition to develop and analyze composite coincident economic indicators to provide a broad representation of the underlying economic conditions. In order to develop a similar indicator of the direction of economic activity in Greece on a monthly basis, in this paper we introduce a composite coincident indicator of Greek economic activity. The proposed indicator is developed on the basis of the two determining features of economic fluctuations: co-movement among individual economic variables and asymmetric behavior in recessions and expansions. The indicator is constructed by applying a dynamic factor model with regime switching. The selected methodology allows us to obtain both the composite coincident indicator as a single unobserved variable, and the implied probabilities for the regimes of expansion and recession. We use monthly data covering the January 1970-December 2007 period. The evidence supports the application of the Markov switching framework. The empirical results indicate that the applied model with regime switching leads to a satisfactory representation of the sample data. The estimated coincident indicator appears to be adequate for an evaluation of Greek economic activity, since stylized facts of the Greek business cycle are well captured by the model.