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Which indicators matter? Analyzing the Swiss business cycle using a large-scale mixed-frequency dynamic factor model

Issue 2017-08
Pages 48
JEL classification C32, C38, C53, C55, E32
Keywords Business cycle index, dynamic factor model, mixed frequency, Switzerland
Year 2017

  • Which indicators matter? Analyzing the Swiss business cycle using a large-scale mixed-frequency dynamic factor model
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For policy institutions such as central banks, it is important to have a timely and ac-curate measure of past and current economic activity and the business cycle situation. The most prominent example for such a measure is gross domestic product (GDP). However, GDP is only released at a quarterly frequency and with a substantial delay. Furthermore, it captures elements that are not directly linked to the business cycle and the underlying momentum of the economy. In this paper, I construct a new business cycle index for the Swiss economy, which uses state-of-the-art methods, is available at a monthly frequency and can be calculated in real-time, even when some indicators are not yet available for the most recent periods. The index is based on a large and broad set of monthly and quarterly indicators. As I show, for the case of Switzerland, it is important to base a business-cycle index on a broad set of indicators instead of only a small subset. This result contrasts with the results for other countries.