The performance of OECD's composite leading indicator

Abstract

This paper evaluated the performance of OECD's Composite Leading Indicator using the Continuous Wavelet Transform. We used various wavelet tools - wavelet coherency, wavelet phase and wavelet phase difference - to assess the co-movement between the Composite Leading Indicator and three macroeconomic variables - Industrial Production Index, unemployment rate, and real GDP Growth - at each frequency and moment. We also explored the lead–lag relationship between each pair of variables across time and frequency. We concluded that OECD's Composite Leading Indicator is a useful leading indicator of the Industrial Production Index and can be suited for forecasting the unemployment rate. However, it exhibited poor performance regarding GDP growth.