Business Cycle Monitoring with Structural Changes
27 Pages Posted: 27 Aug 2008 Last revised: 21 Dec 2009
Date Written: August 24, 2008
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
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