Real-time Markov Switching and Leading Indicators in Times of the Financial Crisis

Thomas Theobald

No 98-2012, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: This paper uses several macroeconomic and financial indicators within a Markov Switching (MS) framework to predict the turning points of the business cycle. The presented model is applied to monthly German real-time data covering the recession and the recovery after the financial crisis. We show how to take advantage of combining single MS forecasts and of changing the number of regimes on the real-time path, where both leads to a higher forecast accuracy. Changing the number of regimes implies a distinction for recessions representing either a normal or an extraordinary one, which particularly means to determine as early as possible the point in time, from which the last recession structurally exceeded the previous ones. In fact it turns out that the Markov Switching model can signal quite early whether a conventional recession happens or whether an economic downturn will be more substantial.

Keywords: Business Cycle; Leading Indicators; Macroeconomic Forecasting; Markov Switching (search for similar items in EconPapers)
JEL-codes: C24 C53 E37 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.boeckler.de/pdf/p_imk_wp_98_2012.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:imk:wpaper:98-2012

Access Statistics for this paper

More papers in IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute Contact information at EDIRC.
Bibliographic data for series maintained by Sabine Nemitz ().