The predictive power of the business and bank sentiment of firms: A high-dimensional Granger Causality approach

We study the predictive power of industry-specific economic sentiment indicators for future macroeconomic developments. In addition to the sentiment of firms towards their own business situation, we study their sentiment with respect to the banking sector - their main credit providers. The use of industry-specific sentiment indicators results in a high-dimensional forecasting problem. To identify the most predictive industries, we present a bootstrap Granger Causality test based on the Adaptive Lasso. This test is more powerful than the standard Wald test in such high-dimensional settings. Forecast accuracy is improved by using only the most predictive industries rather than all industries. (C) 2016 Elsevier B.V. All rights reserved.