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Markov-Switching and the Ifo Business Climate: the Ifo Business Cycle Traffic Lights

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  • Klaus Abberger
  • Wolfgang Nierhaus

Abstract

Business cycle indicators are used to assess the economic situation of countries or regions. They are closely watched by the public, but are not easy to interpret. Does a current movement of the indicator signal a turning point or not? With the help of Markov Switching Models movements of indicators can be transformed in probability statements. In this article, the most important leading indicator of the German business cycle, the Ifo Business Climate, is described by a Markov Switching Model. Real-time probabilities for the current business-cycle regime are derived and presented in an innovative way: as the Ifo traffi c lights. JEL Classifi cation: E32, C22 Keywords: Ifo business climate, growth cycle, turning points, Markov-switching

Suggested Citation

  • Klaus Abberger & Wolfgang Nierhaus, 2010. "Markov-Switching and the Ifo Business Climate: the Ifo Business Cycle Traffic Lights," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2010(2), pages 1-13.
    • Handle: RePEc:oec:stdkab:5km4gzqtx248
    DOI: 10.1787/jbcma-2010-5km4gzqtx248
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    1. Klaus Abberger & Wolfgang Nierhaus, 2009. "Months for cyclical dominance and the Ifo Business Climate," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 62(07), pages 11-19, April.
    2. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-391, July.
    3. Daniel R. Smith & Allan Layton, 2007. "Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2007(1), pages 79-98.
    4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    5. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    6. Potter, Simon M, 1999. "Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 505-528, December.
    7. Nicolas Carnot & Vincent Koen & Bruno Tissot, 2005. "Economic Forecasting," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-00581-5.
    8. Klaus Abberger & Wolfgang Nierhaus, 2007. "The Ifo Business Climate and turning points of the German business cycle," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(03), pages 26-31, February.
    9. Benoit Bellone, 2005. "Classical Estimation of Multivariate Markov-Switching Models using MSVARlib," Econometrics 0508017, University Library of Munich, Germany.
    10. repec:ces:ifosdt:v::y:2009:i::p:11-19 is not listed on IDEAS
    11. Simon Potter, 1999. "Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 505-528, December.
    12. Klaus Abberger & Klaus Wohlrabe, 2006. "Forecasting qualities of the Ifo Business Climate Index - a look at recent studies," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 59(22), pages 19-26, November.
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    More about this item

    Keywords

    ifo business climate; growth cycle; turning points; markov-switching;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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