Co-movement of Cyclical Components Approach to Construct a Coincident Index of Business Cycles

The accurate assessment of business conditions is a long-standing problem in macroeconomics. To construct a coincident index of growth cycles from a given set of indicators, we propose a new approach: the co-movement of cyclical components (triple-C) approach. For realizing the triple-C approach, we introduce a multi-objective optimization algorithm. We refer to the coincident index of growth cycles as the index of business cycles (IBC) of coincident economic indicators. The IBC based on the triple-C approach has the following properties: (1) its mean is globally stationary; (2) it is constructed as a common factor in the stationary parts of the selected economic indicators; and (3) its variations are as large as possible so that it contains a relatively large amount of information for business cycle analysis. We examine the performance of the constructed IBC by comparing it with a composite index based on data for coincident indicators in Japan. © 2022, The Author(s), under exclusive licence to Springer Nature Switzerland AG.