Using Credit Variables to Date Business Cycle and to Estimate the Probabilities of Recession in Real Time

35 Pages Posted: 10 Aug 2019

Date Written: July 18, 2019

Abstract

Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov-switching regimes is used to handle a large dataset and to cope with the nonlinear evolution of the business cycle. The in-sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis.

Keywords: business cycle, financial cycle, real time estimation, Markow-switching model, state-space model

JEL Classification: C53, E17, E32, E44, G21

Suggested Citation

Aprigliano, Valentina and Liberati, Danilo, Using Credit Variables to Date Business Cycle and to Estimate the Probabilities of Recession in Real Time (July 18, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1229, July 2019. Available at SSRN: https://ssrn.com/abstract=3435135 or http://dx.doi.org/10.2139/ssrn.3435135

Valentina Aprigliano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Danilo Liberati (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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