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Measuring and predicting heterogeneous recessions

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  • Çakmaklı, Cem
  • Paap, Richard
  • van Dijk, Dick

Abstract

This paper examines the usefulness of a more refined business cycle classification for monthly industrial production (IP), beyond the usual distinction between expansions and contractions. Univariate Markov-switching models show that a three regime model is more appropriate than a model with only two regimes. Interestingly, the third regime captures ‘severe recessions’, contrasting the conventional view that the additional third regime represents a ‘recovery’ phase. This is confirmed by means of Markov-switching vector autoregressive models that allow for phase shifts between the cyclical regimes of IP and the Conference Board's Leading Economic Index (LEI). The timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes, providing empirical evidence for the ‘financial accelerator’ theory.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 11 ()
Pages: 2195-2216

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:11:p:2195-2216

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Business cycle; Phase shifts; Regime-switching models; Bayesian analysis; Financial accelerator;

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Cited by:
  1. Candelon, Bertrand & Metiu, Norbert & Straetmans, Stefan, 2013. "Disentangling economic recessions and depressions," Discussion Papers 43/2013, Deutsche Bundesbank, Research Centre.

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