A Multi-Market Approach to Measuring the Cycle
At any given moment there are numerous indicators of the state of an economy or sector. Frequently, these signals are divergent, for example, some may point to an expansion, while others to a contraction. We consider how best to combine such conflicting information into an overall index of economic conditions. This index plays the role of the “underlying cycle” and has the property of minimising the distortionary impact of noise of the n individual signals. This is essentially the panel regression approach of Stock and Watson (2010). We elaborate and evaluate this rich approach with reference to stochastic index number theory, and suggest new interpretations, modifications and extensions, illustrated using world prices of six important metals.