Monitoring Business Cycles with Structural Breaks

Marcelle Chauvet and Simon Potter

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the predictive content of coincident variables for monitoring U.S. recessions in the presence of instabilities. We propose several specifications of a probit model for classifying phases of the business cycle. We find strong evidence in favor of the ones that allow for the possibility that the economy has experienced recurrent breaks. The recession probabilities of these models provide a clearer classification of the business cycle into expansion and recession periods, and superior performance in the ability to correctly call recessions and to avoid false recession signals. Overall, the sensitivity, specificity, and accuracy of these models are far superior as well as their ability to timely signal recessions. The results indicate the importance of considering recurrent breaks for monitoring business cycles.

Keywords: Recession; Instability; Bayesian Methods; Probit model; Breaks. (search for similar items in EconPapers)
JEL-codes: C25 E32 E37 (search for similar items in EconPapers)
Date: 2007-12-31, Revised 2009-04-30
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15097

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