Measuring and predicting heterogeneous recessions

Cem Çakmaklı, Richard Paap and Dick van Dijk

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 11, 2195-2216

Abstract: This paper examines the usefulness of a more refined business cycle classification for monthly industrial production (IP), beyond the usual distinction between expansions and contractions. Univariate Markov-switching models show that a three regime model is more appropriate than a model with only two regimes. Interestingly, the third regime captures ‘severe recessions’, contrasting the conventional view that the additional third regime represents a ‘recovery’ phase. This is confirmed by means of Markov-switching vector autoregressive models that allow for phase shifts between the cyclical regimes of IP and the Conference Board's Leading Economic Index (LEI). The timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes, providing empirical evidence for the ‘financial accelerator’ theory.

Keywords: Business cycle; Phase shifts; Regime-switching models; Bayesian analysis; Financial accelerator (search for similar items in EconPapers)
JEL-codes: C11 C32 C51 C52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Measuring and Predicting Heterogeneous Recessions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:11:p:2195-2216

DOI: 10.1016/j.jedc.2013.06.004

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