Question

What is meant by a direct signal and an indirect signal. Below is the answer I provided. Can you confirm if this answer should be changed to an indirect signal. And if yes, can you provide an example for an direct signal?  

A direct signal is a macro indicator that signals directly what is being measured, An example of a direct signal is if a bank closes $8,300,000 loans in February and $8,500,00 loans in March. In February the average 30 year fixed rate for a mortgage was 3.64%. In March, the average fixed rate was 3.38%. This decrease can be contributed to the decrease in the Fed Funds rate by The Federal Reserve Bank. In February the rate was 1.58% and in March the rate was .65%. The fed funds rate is the interest rate that banks use to borrower from each other for short term loans. As a result, this is affects the mortgage interest rates charged by banks.

Answer 1

Data analysis is a key aspect in Economics .A huge amount of data is collected by various economies and the analysis and interpretation of this data can provide us a future direction of economy. This economic data can provide two types of signals

1 Direct signal- It directly measures the movement of the variable being monitored. Usually these are quantitative and once they are measured they take the form of macro indicator being monitored

2 Indirect signal- These signals are based on the correlation between different variables or indicators. Therefore if there is a correlation between one variable with the other one, any change in one can indirectly signal a change in other.

Now a simple example of indirect signal is, suppose the central bank of any country releases a price forecast and the data shows that the inflation will rise sharply if the policy rates are left unchanged. This gives a signal of tightening of policy in near future. On the other hand if a central bank directly gives a projection of policy rates for each quarter, it is an example of direct signal as the variable being monitored is being directly measured. Another good example can be retail sales data. If the retail sales index is high the direct signal we get is that customers are spending more on specific retail goods and the indirect signal can be that the consumers have confidence in market and there will be steady job growth, wage growth etc.

So the example given by you is indirect signal as it had to be inferred from the data that the rates had been decreased by fed which led to reduction of mortgage rated and this further led to closing of higher number of accounts.