A monthly consumption indicator for Germany based on internet search query data

In this study we introduce a new monthly indicator for private consumption in Germany based on search query time series provided by Google Trends. The indicator is based on unobserved factors extracted from a set of consumption-related search categories of the Google Trends application Insights for Search. The predictive performance of the indicator is assessed in real time relative to the European Commission’s consumer confidence indicator and the European Commission’s retail trade confidence indicator. In out-of-sample nowcasting experiments the Google indicator outperformed the surveybased indicators. In comparison to the other indicators, the new indicator also provided substantial predictive information on consumption beyond that already captured in other macroeconomic variables.Google Trends, Private Consumption, Forecasting, Consumer Sentiment Indicator

The quest for the best consumer confidence indicator

We search through all possible consumer confidence indicators in order to find the single indicator that has the highest correlation with private consumption growth. Moreover, we contrast this indicator to the Consumer Confidence Indicator used by the European Commission, and some alternative indicators; also in terms of their predictive power of private consumption. In this context, we test the hypothesis that an indicator based on questions related to the household, rather than the general economy, would prove informative. We find that this "micro" indicator, as well as an optimal indicator that takes into account the specifics of all EU member states, outperform the current Consumer Confidence Indicator. Both these indicators also perform better than an indicator based on the popular factor methodology.The quest for the best consumer confidence indicator, consumer confidence, private consumption, predictive power, Jonsson, Lindén

Forecasting Financial Extremes: A Network Degree Measure of Super-exponential Growth

Investors in stock market are usually greedy during bull markets and scared during bear markets. The greed or fear spreads across investors quickly. This is known as the herding effect, and often leads to a fast movement of stock prices. During such market regimes, stock prices change at a super-exponential rate and are normally followed by a trend reversal that corrects the previous over reaction. In this paper, we construct an indicator to measure the magnitude of the super-exponential growth of stock prices, by measuring the degree of the price network, generated from the price time series. Twelve major international stock indices have been investigated. Error diagram tests show that this new indicator has strong predictive power for financial extremes, both peaks and troughs. By varying the parameters used to construct the error diagram, we show the predictive power is very robust. The new indicator has a better performance than the LPPL pattern recognition indicator.Comment: 16 pages, 6 figure

Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy

Using a simple single-equation approach, many studies have shown that the term structure of interest rates or its approximation - the term spread - is a useful indicator of future inflation and/or future real economic activity. However, this paper argues that shortcomings of the single-equation approach may produce results that are biased, and that the predictive ability must be analyzed from within a model framework. We have elected to use a simple macroeconomic model of a small open economy and examine the predictive properties of the term spread from within its framework. The main contribution of this paper to the literature is threefold. First, we show that the predictive ability of the term spread is not structural but monetary-policy dependent. Second, we argue that the term spread's predictive ability with regard to future inflation (real economic activity) increases as more emphasis is placed on inflation (real economic activity) stabilization in the central bank's reaction function. Third, we show that understanding the way expectations are formed is an important prerequisite for using the term spread as an indicator. Apart from these general findings, the predictive power of the term spread is examined in the context of the Czech economy. It is shown that the term spread between one-year and three-month PRIBOR interest rates of one percentage-point indicates that agents expect inflation to be almost one percentage-point above the inflation target six quarters in the future.Term spread, Monetary policy, Macroeconomic modeling

Money and Inflation in the Euro Area: A Case for Monetary Indicators?

This paper studies the relationship between inflation, output, money and interest rates in the euro area, using data spanning 1980 2000. The P* model is shown to have considerable empirical support. Thus, the price gap' or, equivalently, the real money gap' (the gap between current real balances and long-run equilibrium real balances), has substantial predictive power for future inflation. The real money gap contains more information about future inflation than the output gap and the Eurosystem's money-growth indicator (the gap between current M3 growth and a reference value). The results suggest that the Eurosystem's money-growth indicator is an inferior indicator of future inflation.

"Too dispersed to monitor? Ownership dispersion, monitoring and the prediction of bank distress"

This paper conducts an empirical assessment of the theories stating that ownership concentration improves the quality of shareholders' monitoring. In contrast with other studies, we do not use regressions of risk/performance on ownership concentration. Instead, we build an early warning model of bank distress that includes a leading indicator derived from banks' share price, the Merton-KMV distance to default (DD). The significance of this indicator depends on the efficacy of shareholders' monitoring. On a sample of European banks, we show that the predictive power of the DD is satisfactory only when banks' shareholding is characterized by the presence of blockholders.Monitoring; Ownership concentration; Block ownership; Bank distress; Early warning models; Distance to default

Macroeconomic Imbalances as Indicators for Debt Crises in Europe

European authorities and scholars published proposals on which indicators of macroeconomic imbalances might be used to uncover risks for the sustainability of public debt in the European Union. We test the ability of four proposed sets of indicators to send early-warnings of debt crises using a signals approach for the study of indicators and the construction of composite indicators. We find that a broad composite indicator has the highest predictive power. This fact still holds true if equal weights are used for the construction of the composite indicator in order to reflect the uncertainty about the origin of future crises.macroeconomic surveillance, macroeconomic imbalances, economic governance, signals approach, European Union (EU), European Monetary Union (EMU)

Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries

Using a signal extraction framework and looking at OECD countries over a 30 year period this paper attempts to identify a number of variables significant in predicting near-crises as a pre-cursor to full-fledged crises. These include growth in pension assets as an indicator for the development of liquidity bubbles, equity market dividend yields as a proxy for corporate balance sheet health, banking sector assets growth and relative size to GDP. We also study the development of asset price bubbles through an equity markets indicator and a house price indicator. Finally we also look at a banking sector funding stability indicator and liquidity indicator on a micro-level. Simultaneously, a dynamic research design improves on previous static set-ups and enhances the model predictive power and applicability to different time periods. This paper shows that as early as 2004, clear signals were being given for a number of countries that vulnerabilities were building up with out-of-sample performance better than in-sample in terms of overall noise to signal ratios, showing a significant improvement compared to earlier work. EWS design has significant implications for financial stability and financial regulation.financial crises, financial fragility, liquidity bubbles, early warning signals, financial stability, financial regulation