A statistically optimal framework for real time business conditions index for Indian economy Suresh Anli Assistant Professor, Commerce, Madras Christian College, Tambaram, Chennai – 600059, India Online published on 21 September, 2017. Abstract The state of the real economy evolves in a continuous fashion. Economic agents and policy makers, while making decisions in real time, require accurate and timely understanding of the state of real activity. In the light of the changing nature of the economy where increasingly more and more activities being channelized through both organised and unorganized business sectors, the measurement of business condition on real time basis is of paramount importance. In this context, in order to achieve an accurate and timely estimate of the state of real activity in a systematic, replicable and statistically optimal manner, this paper proposes a framework to construct a real-time business conditions index for India. The study primarily motivated by the seminal work of Aruoba, Diebold and Scotti (2009), for the high frequency business conditions assessment for the U.S. economy. Based on various economic indicators measured at different frequencies, this paper develops a real-time business conditions index for India following a dynamic factor model framework for extracting signals from continuously evolving states. A Kalman filter routine used for signal extraction from state-space representation as well as evaluation of likelihood function. Empirical results show that this coincident indicator tracks the overall economic activity reasonably well. Top Keywords Business Cycle, Dynamic Factor Model, Turning Points, State-Space Model, Expansion. Top |