1. A CLI for a small transition economy – the case of Croatia Amina Ahec-Sonje Katarina Bacic

2. A CLI for a small transition economy > the case of Croatia 2 Presentation will consist of… Explanation of what the Croatian composite prognostic index is … How the system’s reference series was chosen What methods were used to develop/review the Croatian composite prognostic index How the prognostic index is computed and interpreted Final remarks and future directions/tasks

3. A CLI for a small transition economy > the case of Croatia 3 CROatian LEading Indicator (CROLEI) today average lead time is 5,7 months calculated on monthly basis record in forecasting turning points in the Croatian business cycle: 1995 – 2 mths. ; 1998 – 4 mths.; 1999 - 3 mths.; 2002 - 8 mths. (link)(link) 11 components: -monetary and financial (5) -real (4) -fiscal (1) -external trade (1)

4. A CLI for a small transition economy > the case of Croatia 4 Development of CROLEI NBER methodology applied in 1993/94, first published in 1995 Main obstacle> time series > short, with breaks, frequent revisions Prognostic system with identified lead, lag and coincident indicators Methodological revision of the system every 2 yrs. Importance of a meticulously run database, 104 time series in 2004 PROCESS׃ 1.Identifying reference series > volume of industrial production 2.Adjusting series for inflation and seasonal adjustment 3."SCORING “ method 4.Calculation of the index

5. A CLI for a small transition economy > the case of Croatia 5 Reference series: INDUSTRIAL PRODUCTION Best option >GDP unsuitable because of Q. basis Second best choice >ind. production index, moth. Basis Industry overlaps with GDP, both as seasonally adj. series and in trend/cycles One shortcoming > represents only 28% of TVA

6. A CLI for a small transition economy > the case of Croatia 6 2. GRAPHIC AND SCORING method GRAPHIC METHOD>  graphically comparing potential indicators against industrial trend-cycle  Results in a list of coincident indicators, leads and lags  Subjective evaluation, complemented with objective… SCORING METHOD> N=25 Evaluation and analysis of the role & quality of series Follows NBER methodology, except in one step Series are scored according to their> 1.Economic significance 20% 2.Statistical adequacy 20% 3.Economic significance of the link with the ref. series 30% 4.Smoothness 20% 5.Currency of statistics 10%

7. A CLI for a small transition economy > the case of Croatia 7 …HOW WE SCORED SERIES… 1. Score of economic significance > key activities in the cyclical eco. process 2. Statistical adequacy > the quality of statistical methods of collecting data 3. Economic significance of the link with the ref. series > instead of the conformity to the business cycle, we use bi-variate Granger causality test (Auerbach, 1982): H: Leading indicator does not Granger cause CROLEI (ß=0) if H is rejected (ß≠0), then series are possible LI and R 2 is used for scoring 4. Score of smoothness > seasonal ARIMA models and the measure MCD-months for cyclical dominance 5. Currency of statistics > promptness of data and data availability

8. A CLI for a small transition economy > the case of Croatia 8 SCORES AND THE SELECTION OF COMPONENTS Narrower selection of leads is founded on 4 requirements:  a non dominant, ignorable irregular component;  high total score, with 70 points as a threshold for entering the index;  long enough lead time, starting from t-4;  priority is given to economic aggregates (plus to be careful that series that are representatives of the same activity, but on a different degree of aggregation do not enter the index)

9. A CLI for a small transition economy > the case of Croatia 9 RESULTS 25 indicators scored with scores ranging from 46 to 92 points 13 series that have traditionally shown to be good indicators kept their good scores / again are eligible 11 components chosen following the principle of wide/complete coverage of different areas an economy

10. A CLI for a small transition economy > the case of Croatia 10 Scores and significance weights

11. A CLI for a small transition economy > the case of Croatia 11 Computation of the CROLEI computed by following the NBER/BEA instructions (BEA/USDC, 1977; Zarnowitz i Boschan, 1975; Gapinski, 1982; Shiskin, 1961) that consist of five methodological steps and those are: -Computing symmetric (Shiskin’s) percentage changes; -Standardization of the amplitude; -Weighting of the standardized changes; - Standardization of Rt -Turning monthly changes into the index RESULT: a prognostic expression that may be seen as a weighted average of the chosen leads

12. A CLI for a small transition economy > the case of Croatia 12 Interpretation of the CROLEI Few types of interpretation> Vaccara and Zarnowitz (1977) : consecutive three falls/rises (first difference between current and the previous month) in the composite index value signals a recession/recovery of the total economic activity Stekler and Schepsman (1973): 4 month fall (or rise) below/above the last lowest/highest point in the index to be considered as an interpretation criterion for turns Additional measure - the diffusion index complements the interpretation of the prognostic expression. Its value may fall into three possible ranges: a)0 – 50 range> a recession or a fall; b)50 – 75 range> a moderate growth c)75 – 100 range> an acceleration or an expansion

13. A CLI for a small transition economy > the case of Croatia 13 CONCLUSION Construction of CROLEI follows the original NBER method to the extent that it is possible Throughout the revisions of CROLEI, results of the graphic and scoring procedure remain consistent in that the same series obtain good scores (list)list In the modified step in the scoring procedure, we follow recommendations on what to do from the economic literature – result: CROLEI predicts movement of the reference series and not only its turns Revised CROLEI indices appear to have a very similar cyclical pattern to the old CROELI despite the introduction of some new components (figure)figure) The new CROLEI contains several series that were already a part of the old indices Shorter lead time does not imply a loss in the prognostic power (list)list Quality of the index improves with every new revision because of the introduction new series in the database and because time series are getting longer

14. A CLI for a small transition economy > the case of Croatia 14 Future directions and tasks A new revision of CROLEI is due in 2007 Priority will be given to determining turns in a business cycle using a scientific method instead of only using subjective evaluation Carefully monitoring when the moment will be right for applying all of the original steps of the barometric method In due time developing prognostic indices for the Croatian regions

15. A CLI for a small transition economy > the case of Croatia 15 CROLEI from 1999 and CROLEI from 2004

16. A CLI for a small transition economy > the case of Croatia 16 13 persistent leads Employed with the help of the Croatian Employment Agency during a month Users of unemployment compensation Nominal net wage per employee Tourist nights, total Foreign tourist nights, total Retail trade, real Unconsolidated revenues of state, county and municipal budgets Broadest money M4 Reserve money Money M1 Money M1a Deposit Money Banks’ Claims State budget expenditures, total (return)return

17. A CLI for a small transition economy > the case of Croatia 17 6 series that appear in CROLEI from ’99 and from ‘04 Employed with the help of the Cro. Employment Agency during a month Tourist nights, total Retail trade, real Unconsolidated revenues of state, county and municipal budgets Broadest money M4 Time and Sav. Deposits with Dep. Money Banks

18. A CLI for a small transition economy > the case of Croatia 18 CROLEI and INDUSTRY 1/95-7/04 (link) 2000=100(link)