AN EVALUATION OF FORECASTING USING LEADING INDICATORS

We consider the use of indices of leading indicators in forecasting an d macro-economic modelling. The procedures used to select the componen ts and construct the indices are examined, noting that the composition of indicator systems gets altered frequently. Cointegration within th e indices, and between their components and macro-economic variables a re considered as well as the role of co-breaking to mitigate regime sh ifts. Issues of model choice and data-based restrictions are investiga ted. A framework is proposed for index analysis and selecting indices, and applied to the UK longer-leading indicator. The effects of adding leading indicators to macro models are considered theoretically and f or UK data.