Do Confidence Indicators Help Predict Economic Activity? The Case of the Czech Republic

We examine whether confidence indicators—and their underlying components—improve the forecasts of future economic activity. Using quarterly data from the Czech Republic in 1999–2011, we estimate a vector autoregression model of the Czech economy (consisting of several commonly used macroeconomic variables) and compare its forecasting performance with models that additionally contain domestic and foreign confidence indicators. Our results suggest that although confidence indicators are contemporaneously well correlated with GDP, they fail to improve the GDP forecasts vis-à-vis the model based on macroeconomic variables only or vis-à-vis autoregressive models.