Comment on Harding and Pagan 'The econometric analysis of some constructed binary time series'

Michael Dueker

No 2007-054, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This comment discusses Harding and Pagan's (2007) article that advocates modeling the NBER business cycle chronology as the outcome of the two-quarter rule. The comment shows that the two-quarter rule does not fare well as a description of the decision-making of the NBER with real-time data available at the time the NBER declared the turning points. In addition, it is not clear how generally one could posit tractable rules-such as the two-quarter rule-for other constructed binary time series, such as stock market booms and busts. As an alternative to modeling the NBER chronology per se, this comment suggests a modified Qual VAR that includes autoregressive dynamics in the latent business cycle index. Out-of-sample forecast results from this model look promising with real-time data without the econometric shortcomings highlighted in Harding and Pagan's critique of the literature to date.

Keywords: Business cycles; time series analysis (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-mac
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