Using the Dynamic Bi-Factor Model with Markov Switching to Predict the Cyclical Turns in the Large European Economies
AbstractThe appropriately selected leading indicators can substantially improve the forecasting of the peaks and troughs of the business cycle. Using the novel methodology of the dynamic bi-factor model with Markov switching and the data for the three largest European economies (France, Germany, and UK) we construct a composite leading indicator (CLI) and a composite coincident indicator (CCI) as well as corresponding recession probabilities. We estimate also a rival model of the Markov-switching VAR in order to see, which of the two models brings better outcomes. The recession data derived from these models are compared to three reference chronologies: those of OECD and ECRI (growth cycles) and those obtained with quarterly Bry-Boschan procedure (classical cycles). Dynamic bi-factor model and MSVAR appear to predict the cyclical turning points equally well without systematic superiority of one model over another.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 554.
Length: 48 p.
Date of creation: 2006
Date of revision:
Forecasting turning points; Composite coincident indicator; Composite leading indicator; Dynamic bi-factor model; Markov switching;
Other versions of this item:
- Konstantin A. Kholodilin, 2007. "Using the Dynamic Bi-Factor Model with Markov Switching to Predict the Cyclical Turns in the Large European Economies," Money Macro and Finance (MMF) Research Group Conference 2006 13, Money Macro and Finance Research Group.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-26 (All new papers)
- NEP-ECM-2006-02-26 (Econometrics)
- NEP-EEC-2006-02-26 (European Economics)
- NEP-ETS-2006-02-26 (Econometric Time Series)
- NEP-MAC-2006-02-26 (Macroeconomics)
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