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Measuring and Predicting Heterogeneous Recessions

  • Cem Cakmakli

    ()

    (Department of Quantitative Economics, University of Amsterdam)

  • Richard Paap

    ()

    (Econometric Institute, Erasmus University Rotterdam)

  • Dick van Dijk

    ()

    (Econometric Institute, Erasmus University Rotterdam)

This paper conducts an empirical analysis of the heterogeneity of recessions in monthly U.S. coincident and leading indicator variables. Univariate Markovswitching models indicate that it is appropriate to allow for two distinct recession regimes, corresponding with ‘mild’ and ‘severe’ recessions. All downturns start with a mild decline in the level of economic activity. Contractions that develop into severe recessions mostly correspond with periods of substantial credit squeezes as suggested by the ‘financial accelerator’ theory. Multivariate Markov-switching models that allow for phase shifts between the cyclical regimes of industrial production and the Conference Board Leading Economic Index confirm these findings.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1206.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1206.

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Length: 58 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:koc:wpaper:1206
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  1. Paap, R. & Segers, R. & van Dijk, D.J.C., 2007. "Do leading indicators lead peaks more than troughs?," Econometric Institute Research Papers EI 2007-08, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  2. Benjamin M. Friedman, 1984. "Lessons from the 1979-1982 Monetary Policy Experiment," NBER Working Papers 1272, National Bureau of Economic Research, Inc.
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  9. Thomas Theobald, 2012. "Real-time Markov Switching and Leading Indicators in Times of the Financial Crisis," IMK Working Paper 98-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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