Coincident and leading indicators for the euro area: A frequency band approach

The aim of this paper is to build monthly coincident and leading composite indicators for the euro area growth cycle. In contrast with previous literature, where the variables to be included in the composite indicators are chosen according to their overall comovement with the reference cycle, we resort to frequency analysis to achieve additional insight about their relationships at different frequency bands. We find that, in general, the lead/lag properties of the variables depend on the cycle periodicity. The resulting indicators are analysed and a comparison with other composite indicators proposed in the literature is made. We find that this approach allows for substantial gains when the focus is on leading indicators, especially as the desired time lead increases.