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Forecasting the German Cyclical Turning Points: Dynamic Bi-Factor Model with Markov Switching

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Listed author(s):
  • Kholodilin Konstantin A.

    ()

    (DIW Berlin, Königin-Luise-Str. 5, D-14195 Berlin, Germany)

Abstract

This paper proposes a dynamic bi-factor model with Markov switching which detects and predicts turning points of the German business cycle. It estimates simultaneously the composite leading indicator (CLI) and composite coincident indicator (CCI) together with corresponding probabilities of a recession. According to the bi-factor model, CLI leads CCI by about 3 months at both peaks and troughs. The model-derived recession probabilities of CCI and CLI capture the turning points of the ECRI’s and OECD’s reference cycles much better than the dynamic single-factor model with Markov switching.

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Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

Volume (Year): 225 (2005)
Issue (Month): 6 (December)
Pages: 653-674

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Handle: RePEc:jns:jbstat:v:225:y:2005:i:6:p:653-674
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Keywords: Forecasting turning points; composite coincident indicator; composite leading indicator; dynamic bifactor model; Markov switching;

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  1. Phillips, Kerk L., 1991. "A two-country model of stochastic output with changes in regime," Journal of International Economics, Elsevier, vol. 31(1-2), pages 121-142, August.
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