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Extracting non-linear signals from several economic indicators

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Author Info

  • Maximo Camacho

    (Universidad de Murcia)

  • Gabriel Perez-Quiros

    ()
    (Banco de España)

  • Pilar Poncela

    (Universidad Autónoma de Madrid)

Abstract

We develop a twofold analysis of how the information provided by several economic indicators can be used in Markov-switching dynamic factor models to identify the business cycle turning points. First, we compare the performance of a fully non-linear multivariate specification (one-step approach) with the “shortcut” of using a linear factor model to obtain a coincident indicator which is then used to compute the Markov-switching probabilities (two-step approach). Second, we examine the role of increasing the number of indicators. Our results suggest that one step is generally preferred to two steps, although its marginal gains diminish as the quality of the indicators increases and as more indicators are used to identify the non-linear signal. Using the four constituent series of the Stock-Watson coincident index, we illustrate these results for US data.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1202e.pdf
File Function: First version, february 2012
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1202.

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Length: 42 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:bde:wpaper:1202

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Keywords: Business cycles; output growth; time series;

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Cited by:
  1. Gabriele Fiorentini & Enrique Sentana, 2013. "Dynamic Specification Tests For Dynamic Factor Models," Working Papers wp2013_1306, CEMFI.

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