Business Cycles, Indicators, and Forecasting.

• Author: Carroll, Michael C.

In the past ten years, advances in macroeconomic theory, statistical methods and computational power have led to the development of new forecasting methods that are slowly beginning to replace the traditional structural econometric models. In Business Cycles, Indicators, and Forecasting, the editors, James H. Stock and Mark W. Watson, have compiled a collection of eight time-series forecasting papers that were originally presented at a conference of the National Bureau of Economic Research in May of 1991. The individual papers in this volume can be grouped into three broad areas. The first four papers provide an exposition of recently developed statistical techniques. Specifically, these papers employ time-series and Bayesian vector autoregressive (BVAR) methodologies which can be used to generate stochastic simulations to produce probability forecasts of discrete recession/expansion events. The second group consists of a pair of empirical papers which explore the historical relations among specific time series. The final group contains two methodological papers that address dynamic factor models in high dimensional systems and nonlinear time-series modeling. Following each paper the text offers a comment which contains a detailed criticism of each paper's analytical content. In this review, I will offer a more descriptive discussion of each author's contribution.

The first group of papers begins with Victor Zarnowitz and Phillip Braun's encyclopedic paper entitled "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance." The authors examine the general problems and the history of forecasted evaluations and surveys. They also detail the NBER-ASA data collection methods and discuss the analytical implication of the data set which contains twenty variables and runs for eighty-six consecutive quarters. In the second paper, "A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience" James H. Stock and Mark W. Watson set the analytical tone for the remaining three papers in this group. The Stock and Watson paper offers a detailed account of the construction and empirical performance of a recession index. The model generates "three indexes of overall economic activity on a monthly basis: an experimental coincident index (the XCI); and experimental leading index (the XLI), which is a forecast of the growth in the XCI over the subsequent...