On the Construction of the European Economic Sentiment Indicator

Economic sentiment surveys are carried out by all European Union member states and are often seen as early indicators for future economic developments. Based on these surveys, the European Commission constructs an aggregate European Economic Sentiment Indicator (ESI). This paper compares the ESI with more sophisticated aggregation schemes based on statistical methods: dynamic factor analysis and partial least squares. The indicator based on partial least squares clearly outperforms the other two indicators in terms of comovement with economic activity. In terms of forecast ability, the ESI, constructed in a rather ad hoc way, can compete with the other indicators.

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