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How Useful are Sentiment Indicators?

By Felix P. Hüfner and Michael SchröderZentrum Für Europäische, Wirtschaftsforschung Gmbh, Felix P. Hüfner and Michael Schröder


neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar. Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW. Non-technical Summary We analyze four economic sentiment indicators for the German economy: the ifo business expectations (ifo), the European Commission’s Economic Sentiment Indicator for Germany (ESIN), the Purchasing Managers ’ Index (PMI) and the ZEW Indicator of Economic Sentiment (ZEW) using the year-on-year growth rate of industrial production as a reference. A look at the publication schedule of the indicators shows that all of them are released at least one month prior to the German industrial production statistics. Cross correlations indicate that the correlation between the ifo, PMI and ZEW indicators and the year-on-year growth rates of industrial production increases when the indicators are lagged. This suggests that these three indicators are indeed leading economic activity in Germany. The ESIN indicator, on the other hand, seems to lag industrial production. Subsequent Granger causality tests reveal that the ifo business expectations, the PMI and the ZEW Indicator of Economic Sentiment lead the year-on-year growth rate of German industrial production by five months. Taking into account the publication lag of industrial production (about six weeks) this lead extends to more than six months. Analyzing lead/lag structures among the ifo, PMI and ZEW indicators we find that the ZEW indicator significantly leads the ifo business expectations by one month. Furthermore, the ifo expectations indicator has a lead of one month over th

Year: 2011
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