Two Alternative Approaches to Modelling the Nonlinear Dynamics of the Composite Economic Indicator

Economics Bulletin, 2002, vol. 3, issue 25, pages 1-17

Abstract: This paper sets up a common unobserved factor model with smooth transition autoregressive dynamics. This model is compared to the already classical common factor model with regime-switching. Both models' in-sample and out-of-sample performance in terms of capturing and predicting the business cycle turning points is evaluated. The comparison of the model-derived probabilities to the NBER business cycle dating shows statistically equivalent in-sample forecasting accuracy of these techniques. The common factor model with exponential STAR outperforms the model with logistic STAR and that with Markov switching in terms of out-of-sample prediction with up to 3 month horizon.

Keywords: business cycle; coincident economic indicator; common dynamic factor; Markov switching; NBER dates; smooth transition autoregression; turning points (search for similar items in EconPapers)
JEL-codes: C5 E3 (search for similar items in EconPapers)
Date: 2002 Written 2002-11-03
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Working Paper: Two Alternative Approaches to Modelling the Nonlinear Dynamics of the Composite Economic Indicator
Journal Article: Two Alternative Approaches to Modelling the Nonlinear Dynamics of the Composite Economic Indicator (2002)
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