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Modelling asymmetric persistence over the business cycle

  • Franses, Ph.H.B.F.
  • Paap, R.

We address the issue of time varying persistence of shocks to macroeconomic time series variables by proposing a new and parsimonious time series model. Our model assumes that this time varying persistence depends on a linear combination of lagged explanatory variables, where this combination characterizes the business cycle regimes. The key feature of our model is that an autoregressive parameter takes larger values only when this indicator variable exceeds a stochastic threshold. The parameters and the (lags of the) variables that constitute the indicator variable have to be determined from the data. Other forms of censoring amount to straightforward extensions. Our application to US unemployment shows that the model fits very well. A linear combination of lagged (differenced) industrial production, oil price, interest spread and stock returns amounts to an adequate indicator of an upcoming recession, which corresponds with explosive behavior of unemployment. Also, the out-of-sample forecasts from our model oftentimes improve those from linear and other nonlinear models.

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Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 9852.

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Date of creation: 01 Jan 1998
Date of revision:
Handle: RePEc:ems:eureir:1525
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  1. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  2. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  3. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  4. Marco Bianchi & Gylfi Zoega, 1996. "Unemployment persistence: Does the size of the shock matter?," Bank of England working papers 50, Bank of England.
  5. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis in Unemployment," NBER Working Papers 2035, National Bureau of Economic Research, Inc.
  6. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Grillenzoni, Carlo, 1993. "ARIMA Processes with ARIMA Parameters," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 235-50, April.
  8. Elwood, S. Kirk, 1998. "Is the persistence of shocks to output asymmetric?," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 411-426, April.
  9. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  10. Granger, E.J. & Swanson, N.R., 1996. "An introduction to stochastic Unit Root Processes," Papers 4-96-3, Pennsylvania State - Department of Economics.
  11. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
  12. Leybourne, S J & McCabe, B P M & Tremayne, A R, 1996. "Can Economic Time Series Be Differenced to Stationarity?," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 435-46, October.
  13. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  14. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  15. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  16. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  17. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  18. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
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