Unobserved Leading and Coincident Common Factors in the Post-War U.S. Business Cycle
The paper introduces a two-factor model of the common leading and coincident economic indicators. Both factors are unobserved and each of them captures the dynamics of a corresponding group of the observed time series. The common leading factor is assumed to Granger-cause the common coincident factor. This property is used to estimate these two factors simultaneously and hence more efficiently. Two models of the latent leading and coincident factors are studied : a model with linear dynamics and a model with Markov-switching dynamics introduced through the leading factor intercept term. Moreover, a possibility of the individual leading variables having different leads over the common coincident indicator is considered. These models - both with linear and with regime-switching dynamics - were applied to the US monthly macroeconomic time series. The business cycle dating resulting from the nonlinear model closely corresponds to the NBER chronology and leads its turning points by 3-5 months.
|Date of creation:||01 Jan 2002|
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- Diebold & Rudebusch, .
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_061, University of Pennsylvania.
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"Dynamic Linear Models with Markov-Switching,"
91-8, York (Canada) - Department of Economics.
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- Chauvet, Marcelle & Potter, Simon, 2000. "Coincident and leading indicators of the stock market," Journal of Empirical Finance, Elsevier, vol. 7(1), pages 87-111, May.
- Roberto S. Mariano & Yasutomo Murasawa, 2003. "A new coincident index of business cycles based on monthly and quarterly series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 427-443.
- James H. Stock & Mark W. Watson, 1988. "A Probability Model of The Coincident Economic Indicators," NBER Working Papers 2772, National Bureau of Economic Research, Inc.
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