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Predicting U.S. Business Cycle Turning Points Using Real-Time Diffusion Indexes Based on a Large Data Set

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  • Yongchen Zhao

    (Towson University)

Abstract

This paper considers the usefulness of diffusion indexes in identifying and predicting business cycle turning points in real time using a large data set from March 2005 to September 2014. We construct a monthly diffusion index, compare several smoothing and signal extraction methods, and evaluate predictions based on our index. We document the performance of diffusion-index-based forecasts and compare it against the performance of dynamic-factor-model-based forecasts. Our findings suggest that diffusion indexes remain relevant and effective in identifying turning points. In addition, we show that a diffusion index could outperform a dynamic factor model in identifying the onset of the 2008 recession in real time.

Suggested Citation

  • Yongchen Zhao, 2020. "Predicting U.S. Business Cycle Turning Points Using Real-Time Diffusion Indexes Based on a Large Data Set," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 16(2), pages 77-97, November.
    • Handle: RePEc:spr:jbuscr:v:16:y:2020:i:2:d:10.1007_s41549-020-00046-y
    DOI: 10.1007/s41549-020-00046-y
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    Cited by:

    1. Gabriel Mathy & Yongchen Zhao, 2023. "Could Diffusion Indexes Have Forecasted the Great Depression?," Working Papers 2023-05, Towson University, Department of Economics, revised Sep 2023.

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    More about this item

    Keywords

    Business cycle; Diffusion index; Big data; Recession probability; Cyclical downturn;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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