Real-time Recession Probability with Hidden Markov Model and Unemployment Momentum
The R Journal, Forthcoming
8 Pages Posted: 16 Aug 2019 Last revised: 18 Aug 2019
Date Written: August 10, 2019
We show how to construct a composite Hidden Markov Model (HMM) to calculate real-time recession probability, using the jubilee and ldhmm packages in R. The input data is the unemployment rate (UNRATE) which is released monthly by the U.S. government. There are two sub-models: The one-year momentum model and the 6-month acceleration model. The product of the two generates the recession probability. Our model demonstrates that positive momentum in unemployment kicks off a recession. The momentum accelerates during the recession. And eventually the rapid deceleration marks the end of it.
Keywords: Recession, Hidden Markov Model
JEL Classification: C32, E24
Suggested Citation: Suggested Citation