Non-linear Modelling of the Australian Business Cycle using a Leading Indicator

Roland G. Shami () and Catherine Forbes

No 5/02, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: This paper develops a new non-linear model to analyse the business cycle by exploiting the relationship between the asymmetrical behaviour of the cycle and leading indicators. The model proposed is an innovations form of the structural model underlying simple exponential smoothing that is augmented by a latent Markov switching process. Furthermore, the probabilities that drive the Markov process vary with the growth of the leading indicator. The proposed model is used to analyse the Australian business cycle using the gross domestic product as a proxy and the industrial materials prices index as the exogenous leading indicator influencing the transition probabilities. Model parameters are estimated using a Gibbs sampling algorithm and subsequently used for forecasting purposes.

Keywords: Structural model; Markov switching regime; Gibbs sampling; Business cycle; Leading indicator. (search for similar items in EconPapers)
JEL-codes: C11 C15 C22 C51 E32 E37 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2002-08
New Economics Papers: this item is included in nep-ecm and nep-fin
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