Extracting non-linear signals from several economic indicators

Maximo Camacho, Gabriel Perez-Quiros () and Pilar Poncela
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Gabriel Perez-Quiros: Banco de España
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 1202, Working Papers from Banco de España

Abstract: We develop a twofold analysis of how the information provided by several economic indicators can be used in Markov-switching dynamic factor models to identify the business cycle turning points. First, we compare the performance of a fully non-linear multivariate specification (one-step approach) with the “shortcut” of using a linear factor model to obtain a coincident indicator which is then used to compute the Markov-switching probabilities (two-step approach). Second, we examine the role of increasing the number of indicators. Our results suggest that one step is generally preferred to two steps, although its marginal gains diminish as the quality of the indicators increases and as more indicators are used to identify the non-linear signal. Using the four constituent series of the Stock-Watson coincident index, we illustrate these results for US data.

Keywords: Business cycles; output growth; time series (search for similar items in EconPapers)
JEL-codes: C22 E27 E32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012-02
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Extracting Nonlinear Signals from Several Economic Indicators (2015)
Working Paper: Extracting nonlinear signals from several economic indicators (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1202

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