Leading Indicators of the Business Cycle: Dynamic Logit Models for OECD Countries and Russia

Anna Pestova

HSE Working papers from National Research University Higher School of Economics

Abstract: In this paper, I develop the leading indicators of the business cycle turning points exploiting the quarterly panel dataset comprising OECD countries and Russia over the 1980-2013 period. Contrasting to the previous studies, I combine data on OECD countries and Russia into a single dataset and develop universal models suitable for the entire sample with a quality of predictions comparable to the analogues of single-country models. On the basis of conventional dynamic discrete dependent variable framework I estimate the business cycle leading indicator models at different forecasting horizons (from one to four quarters). The results demonstrate that there is a trade-off between forecasting accuracy and the earliness of the recession signal. Best predictions are achieved for the model with one quarter lag (approximately 94% of the observations were correctly classified with a noise-to-signal ratio of 7%). However, even the model with the four quarter lags correctly predicts more than 80% of recessions with the noise-to-signal ratio of 25% can be useful for the policy analysis. I also reveal significant gains of accounting for the credit market variables when forecasting recessions at the long horizons (four quarter lag) as their use leads to a significant reduction of the noise-to-signal ratio of the model. I propose using the “optimal” cut-off threshold of the binary models based on the minimization of regulator loss function arising from different types of wrong classification. I show that this optimal threshold improves model forecasts as compared to other exogenous thresholds.

Keywords: business cycles; leading indicators; turning points; dynamic logit models; recession forecast. (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2015
New Economics Papers: this item is included in nep-cis, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in WP BRP Series: Economics / EC, April 2015, pages 1-31

Downloads: (external link)
http://www.hse.ru/data/2015/05/13/1098775413/94EC2015.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:94/ec/2015

Access Statistics for this paper

More papers in HSE Working papers from National Research University Higher School of Economics
Bibliographic data for series maintained by Shamil Abdulaev () and Shamil Abdulaev ().