Modelling Business Cycle Movements in the UK Economy
This paper models the phases of the UK business cycle using GDP data with a time-varying transition probabilities (TVTP) Markov-switching regime model and exogenous leading indicator variables. Single indicators in linear models are compared with the TVTP framework, with logistic and exponential functions used in the latter. The Markov-switching models capture the major recessions of the sample, but the use of leading indicators through the TVTP framework can improve this regime recognition. Finally, a forecast comparison shows that the TVTP models perform relatively well in predicting during the 1990s, particularly when nominal interest rates are used to generate the regime-switching probabilities. Copyright 2001 by The London School of Economics and Political Science
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Volume (Year): 68 (2001)
Issue (Month): 270 (May)
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