Macroeconomic performance index: a new approach to calculation of economic wellbeing

Since the rise of the global financial crisis, there has been revival of interest in performance indexes that measure the overall stance of the economy and the wellbeing of households. Such indexes typically consist of inflation, growth, employment and long-term interest rates. We develop such an index by appending exchange rate and weighting each variable by the inverse of its variance in order to prevent the more volatile variable to dominate the index. We call this macroeconomic performance index (MPI) and argue that such an index better explains the overall economic stance especially in emerging economies. We generate the index using data from three emerging economies, namely Turkey, Brazil and Poland. Our analysis indicates that the index has a nonlinear structure and hence we analyse its behaviour using threshold autoregressive (TAR) model. It is observed that MPI captures the economic stance and main economic incidents quite successfully in each subject country. To further see the relevance of the MPI, we run TAR cointegration analysis with consumer confidence indexes (CCIs) for the subject countries with TAR cointegration test. The results indicate long-term relationship between the MPI and CCI in all three countries.