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Detecting and forecasting business cycle turning points

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  • Harding, Don

Abstract

The R word has begun to appear in the media again bringing with it three technical questions viz, How will we know we are in recession? How will we know when it has ended? And How can we forecast its onset and ending? This paper does not provide answers to these questions rather it focuses on the technical issues that we need to resolve in order to provide good answers to these questions. The paper has three significant findings. First, the business cycle states obtained by the BBQ algorithm are complex statistical processes and it is not possible to write down an exact likelihood function for them. Second, for the classical and acceleration cycles it is possible to obtain a reasonably simple approximation to the BBQ algorithm that may permit one to write down a likelihood function. Third, when evaluating these algorithms there is a large di¤erence between the results using US GDP as compared to UK GDP or simulated data from models fit to US GDP. Specifically, turning points are much easier to detect in US GDP than in other series. One needs to take this into account when using US based research on detecting and forecasting business cycle turning points.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33583.

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Date of creation: 23 Sep 2008
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Handle: RePEc:pra:mprapa:33583

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Keywords: Business cycle; turning points; forecasting; peak; trough;

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References

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  1. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  2. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, vol. 132(1), pages 59-79, May.
  3. Burnside, Craig, 1998. "Detrending and business cycle facts: A comment," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 513-532, May.
  4. 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.
  5. Durland, J Michael & McCurdy, Thomas H, 1994. "Duration-Dependent Transitions in a Markov Model of U.S. GNP Growth," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 279-88, July.
  6. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  7. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
  8. Clements, M.P. & Krolzig, H-M., 1999. "Business Cycle Asymmetries: Characterisationand Testing Based on Markov-Switching Autoregression," The Warwick Economics Research Paper Series (TWERPS) 522, University of Warwick, Department of Economics.
  9. Don Harding & Adrian Pagan, 1999. "Knowing the Cycle," Melbourne Institute Working Paper Series wp1999n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  10. Harding, Don & Pagan, Adrian, 2003. "A comparison of two business cycle dating methods," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1681-1690, July.
  11. Artis, Michael J & Kontolemis, Zenon G & Osborn, Denise R, 1997. "Business Cycles for G7 and European Countries," The Journal of Business, University of Chicago Press, vol. 70(2), pages 249-79, April.
  12. Don Harding & Adrian Pagan, 2006. "Measurement of Business Cycles," Department of Economics - Working Papers Series 966, The University of Melbourne.
  13. McQueen, Grant & Thorley, Steven, 1993. "Asymmetric business cycle turning points," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 341-362, June.
  14. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  15. Cogley, Timothy, 2001. "Alternative definitions of the business cycle and their implications for business cycle models: A reply to Torben Mark Pederson," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1103-1107, August.
  16. Francis X. Diebold & Glenn D. Rudebusch, 2001. "Five questions about business cycles," Economic Review, Federal Reserve Bank of San Francisco, pages 1-15.
  17. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  18. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, October.
  19. Don Harding & Adrian Pagan, 2006. "The Econometric Analysis of Constructed Binary Time Series," Department of Economics - Working Papers Series 963, The University of Melbourne.
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Citations

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Cited by:
  1. Tony Hall & Jan Jacobs & Adrian Pagan, . "Macro-Econometric System Modelling @75," NCER Working Paper Series 95, National Centre for Econometric Research.
  2. Sylvia Kaufmann, 2010. "Dating and forecasting turning points by Bayesian clustering with dynamic structure: a suggestion with an application to Austrian data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(2), pages 309-344.
  3. Adrian Pagan & Tim Robinson, 2011. "Assessing Some Models of the Impact of Financial Stress upon Business Cycles," RBA Research Discussion Papers rdp2011-04, Reserve Bank of Australia.
  4. Fotis Papailias & Dimitrios D. Thomakos, 2013. "The Baltic Dry Index: Cyclicalities, Forecasting and Hedging Strategies," Working Paper Series 65_13, The Rimini Centre for Economic Analysis.
  5. Adrian Pagan, 2013. "Patterns and Their Uses," NCER Working Paper Series 96, National Centre for Econometric Research.

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