New Eurocoin tracks euro area economic activity in real time
This tutorial note from Banca d'Italia explains the methodology behind the New Eurocoin indicator. It details how the indicator provides a comprehensive, timely, and fluctuation-free measure of euro area economic activity.
Beyond GDP: A comprehensive economic pulse
The Eurocoin indicator offers a comprehensive and timely measure of aggregate economic activity in the euro area, overcoming limitations of traditional data.
Unlike Gross Domestic Product (GDP), which is released quarterly and with delay, Eurocoin provides reliable monthly estimates, updated daily.
It integrates aspects of GDP, Industrial Production (IP), and various surveys, ensuring it covers production, services, and the public sector without subjective judgments.
Crucially, Eurocoin is designed to be free from short-run oscillations, allowing for a clearer identification of medium-run upswings and downturns, which is often obscured in raw GDP or IP data.
This makes it a more agile tool for assessing the current state of the economy.
Smoothing the economic waves: Challenges of real-time data
Accurately assessing the business cycle requires detrending macroeconomic series to isolate their medium- to long-run component.
While log differences are commonly used for stationary series, raw growth rates still contain short-run fluctuations, obscuring genuine economic shifts.
Simple smoothing techniques, like year-on-year changes, can remove these oscillations but introduce phase distortion, causing peaks and troughs to appear with a delay.
An ideal symmetric and centered moving average, which would preserve phase, faces challenges at the end of the sample due to unobserved future values.
This 'end-of-sample problem' is a critical hurdle for constructing smooth, timely economic indicators.
Real-time insights, real-world caveats
The New Eurocoin's advanced factor models offer a robust solution for real-time economic monitoring, providing a more timely and reliable view of the business cycle.
This methodological leap, integrating leading indicators, significantly enhances the ability to discern genuine trends from noise.
However, its inherent complexity and dependence on model assumptions mean outputs, while valuable, require careful interpretation and continuous validation.