Leading Indicators for the Capital Goods Industry

Abstract

The goal of this paper is to build leading indicators to predict the capital goods business cycle in Brazil. We propose a probit model with autoregressive dynamics consisting of series with predictive power to anticipate contractions in this sector. The model is especially suitable for this sector as it includes information about the characteristics of cycle phases and their duration in the estimation of recession probability, and adapts well to the high volatility of the capital goods business cycle. The results indicate that the dynamic probit model has a better forecasting performance than the simple probit model in several aspects, both within and out of sample and in real time.