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Measuring and Predicting Heterogeneous Recessions

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  • Cem Cakmakli

    ()
    (Department of Quantitative Economics, University of Amsterdam)

  • Richard Paap

    ()
    (Econometric Institute, Erasmus University Rotterdam)

  • Dick van Dijk

    ()
    (Econometric Institute, Erasmus University Rotterdam)

Abstract

This paper conducts an empirical analysis of the heterogeneity of recessions in monthly U.S. coincident and leading indicator variables. Univariate Markovswitching models indicate that it is appropriate to allow for two distinct recession regimes, corresponding with ‘mild’ and ‘severe’ recessions. All downturns start with a mild decline in the level of economic activity. Contractions that develop into severe recessions mostly correspond with periods of substantial credit squeezes as suggested by the ‘financial accelerator’ theory. Multivariate Markov-switching models that allow for phase shifts between the cyclical regimes of industrial production and the Conference Board Leading Economic Index confirm these findings.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1206.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1206.

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Length: 58 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:koc:wpaper:1206

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Keywords: Business cycle; phase shifts; regime-switching models; Bayesian analysis;

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  1. Cem Cakmakli & Richard Paap & Dick J.C. van Dijk, 2011. "Modeling and Estimation of Synchronization in Multistate Markov-Switching Models," Tinbergen Institute Discussion Papers 11-002/4, Tinbergen Institute.
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Cited by:
  1. Bertrand Candelon & Norbert Metiu & Stefan Straetmans, 2014. "Disentangling economic recessions and depressions," Working Papers 2014-328, Department of Research, Ipag Business School.

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