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Identifying and Forecasting the Turning Points of the Belgian Business Cycle with Regime-Switching and Logit Models

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Author Info
Vincent, BODART (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
Konstantin, KHOLODILIN
Fati, SHADMAN-MEHTA (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

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Abstract

This paper seeks to elaborate econometric models that can be used to forecast the turning points of the Belgian business cycle. We begin by suggesting three reference cycle, which we hope will fill the void of an official reference chronology for Belgium. We then construct two different types of model to estimate the probabilities of recession : Markov-switching models, and Logit models. We apply each approach to a limited set of data, which are a good representation of the economy, are available early and are subject to only minor revisions. We then select the best performing model for each chronology and type of approach. The out-of-sample results show that the models provide useful indicators of business cycle turning points. They are however far from perfect forecasting tools, especially when it comes to forecasting periods of classical recession.

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Publisher Info
Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005006.

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Length: 40
Date of creation: 15 Mar 2005
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Handle: RePEc:ctl:louvec:2005006

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Related research
Keywords: Refrence chronologies; Markov-Switching and Logit models; forecasting business cycle turning points;

Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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  1. James H. Stock & Mark W. Watson, 1992. "A Procedure for Predicting Recessions With Leading Indicators: Econometric Issues and Recent Experience," NBER Working Papers 4014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Diebold, Francis X & Rudebusch, Glenn D, 1996. "Measuring Business Cycles: A Modern Perspective," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 67-77, February. [Downloadable!] (restricted)
    Other versions:
  3. 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 357-84, March. [Downloadable!] (restricted)
  4. Marcelle Chauvet & Jeremy Piger, 2002. "Identifying business cycle turning points in real time," Working Paper 2002-27, Federal Reserve Bank of Atlanta. [Downloadable!]
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  5. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22. [Downloadable!] (restricted)
  6. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
  7. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March. [Downloadable!] (restricted)
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  8. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," Journal of Business, University of Chicago Press, vol. 62(3), pages 369-91, July. [Downloadable!] (restricted)
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  9. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York. [Downloadable!]
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  10. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany. [Downloadable!]
  11. James H. Stock & Mark W. Watson, 1988. "A Probability Model of The Coincident Economic Indicators," NBER Working Papers 2772, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Layton, Allan P. & Katsuura, Masaki, 2001. "Comparison of regime switching, probit and logit models in dating and forecasting US business cycles," International Journal of Forecasting, Elsevier, vol. 17(3), pages 403-417. [Downloadable!] (restricted)
  13. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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  14. Allan P. Layton & Anirvan Banerji, 2001. "What Is A Recession?: A Reprise," School of Economics and Finance Discussion Papers and Working Papers Series 095, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
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