Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2020-09-15
Revision-Date: 2020-12-14
Number: 20-057/VI
Author-Name: Bram van Os
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Dick van Dijk
Author-Workplace-Name: Erasmus University Rotterdam
Title: Accelerating Peak Dating in a Dynamic Factor Markov-Switching Model
Abstract: The dynamic factor Markov-switching (DFMS) model introduced by Diebold and Rudebusch (1996) has proven to be a powerful framework to measure the business cycle. We extend the DFMS model by allowing for time-varying transition probabilities, with the aim of accelerating the real-time dating of turning points between expansion and recession regimes. Time-variation of the transition probabilities is brought about endogenously using the accelerated score-driven approach and exogenously using the term spread. In a real-time application using the four components of The Conference Board’s Coincident Economic Index for the period 1959-2020, we find that signaling power for recessions is significantly improved and are able to date the 2001 and 2008 recession peaks four and ten months before the NBER.
Classification-JEL: E32, C32
Keywords: Business cycles, generalized autoregressive score models, time-varying transition probabilities, turning points
File-URL: https://papers.tinbergen.nl/20057.pdf
File-Format: application/pdf
File-Size: 3030453 bytes
Handle: RePEc:tin:wpaper:20200057