APPLICATION OF MODEL-BASED APPROACH TO THE CALCULATION OF THE LEADING COMPOSITE INDICATOR: THE CASE OF CROLEI INDEX

The aim of this paper is to improve the existing methodology of the construction of CROLEI index and to calculate new and improved CROLEI index. The purpose of CROLEI index is to signal the turning points in the business cycle in the Republic of Croatia and to provide information about future condition of the real economic activity. The methodological improvements correspond both to the selection of index components and to determination of past business cycle turning points. Business cycle turning points are determined using the filtered probabilities of entering into recession obtained by estimating the Markov switching model, while the selection of index components is based on correlation coefficients significance tests and logit model estimates. New CROLEI index is composed of eight series, and in terms of applied methodology and its ability to signal business cycle turning points it represents an improvement when compared to the old version of the index.