CONSUMER CONFIDENCE AND THE PROBABILITY OF RECESSION: A MARKOV SWITCHING MODEL

Roy Batchelor and Pami Dua
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Roy Batchelor: Delhi School of Economics

No 47, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper uses a recursive Hamilton filter to establish whether and how the Conference Board indexes of consumer confidence can help predict the ends of booms and recessions. Switching points in the overall consumer confidence index consistently lead switching points in the US coincident indicator, though the lead time varies greatly from one cycle to the next. The expectations components of the index are too noisy, particularly in the recent past, to be helpful on their own. And simple versions of the filter produce better ex ante predictions than more complex versions.

Pages: 25 pages
Date: 1997-06
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