Unobserved Leading and Coincident Common Factors in the Post-War U.S. Business Cycle

Konstantin Kholodilin ()

No 2002008, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: The paper introduces a two-factor model of the common leading and coincident economic indicators. Both factors are unobserved and each of them captures the dynamics of a corresponding group of the observed time series. The common leading factor is assumed to Granger-cause the common coincident factor. This property is used to estimate these two factors simultaneously and hence more efficiently. Two models of the latent leading and coincident factors are studied : a model with linear dynamics and a model with Markov-switching dynamics introduced through the leading factor intercept term. Moreover, a possibility of the individual leading variables having different leads over the common coincident indicator is considered. These models - both with linear and with regime-switching dynamics - were applied to the US monthly macroeconomic time series. The business cycle dating resulting from the nonlinear model closely corresponds to the NBER chronology and leads its turning points by 3-5 months.

Keywords: dynamic factor analysis; Markov switching; leading indicator; coincident indicator; Granger causality (search for similar items in EconPapers)
JEL-codes: C5 E3 (search for similar items in EconPapers)
Pages: 21
Date: 2002-01-01
New Economics Papers: this item is included in nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2002008

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