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 macro-economic 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.