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European economic sentiment indicator: An empirical reappraisal

Author

Listed:
  • Petar Sorić

    (Faculty of Economics and Business, University of Zagreb)

  • Ivana Lolić

    (Faculty of Economics and Business, University of Zagreb)

  • Mirjana Čižmešija

    (Faculty of Economics and Business, University of Zagreb)

Abstract
In the last five decades the European Economic Sentiment Indicator (ESI) has positioned itself as a high-quality leading indicator of overall economic activity. Relying on data from five distinct business and consumer survey sectors (industry, retail trade, services, construction and the consumer sector), ESI is conceptualized as a weighted average of the chosen 15 response balances. However, the official methodology of calculating ESI is quite flawed because of the arbitrarily chosen balance response weights. This paper proposes two alternative methods for obtaining novel weights aimed at enhancing ESI's forecasting power. Specifically, the weights are determined by minimizing the root mean square error in simple GDP forecasting regression equations; and by maximizing the correlation coefficient between ESI and GDP growth for various lead lengths (up to 12 months). Both employed methods seem to considerably increase ESI's forecasting accuracy in 26 individual European Union countries. The obtained results are quite robust across specifications.

Suggested Citation

  • Petar Sorić & Ivana Lolić & Mirjana Čižmešija, 2015. "European economic sentiment indicator: An empirical reappraisal," EFZG Working Papers Series 1505, Faculty of Economics and Business, University of Zagreb.
    • Handle: RePEc:zag:wpaper:1505
    as

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    File URL: http://web.efzg.hr/repec/pdf/Clanak%2015-05.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Daniel Tomić Jurica Šimurina Luka Jovanov, 2020. "The Nexus between Economic Sentiment Indicator and Gross Domestic Product; a Panel Cointegration Analysis," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(1), pages 121-140, May.
    2. Emilian DOBRESCU, 2020. "Self-fulfillment degree of economic expectations within an integrated space: The European Union case study," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-32, December.

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    More about this item

    Keywords

    Business and Consumer Surveys; Economic Sentiment Indicator; Nonlinear Optimization with Constraints; Leading Indicator;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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