A Comparison of the Real-Time Performance of Business Cycle Dating Methods

FRB St. Louis Working Paper No. 2005-021A

32 Pages Posted: 28 Jul 2005

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Jeremy Piger

University of Oregon - Department of Economics

Date Written: March 2005

Abstract

This paper evaluates the ability of formal rules to establish U.S. business cycle turning point dates in real time. We consider two approaches, a nonparametric algorithm and a parametric Markov-switching dynamic-factor model. In order to accurately assess the real-time performance of these rules, we construct a new unrevised "real-time" data set of employment, industrial production, manufacturing and trade sales, and personal income. We then apply the rules to this data set to simulate the accuracy and timeliness with which they would have identified the NBER business cycle chronology had they been used in real time for the past 30 years. Both approaches accurately identified the NBER dated turning points in the sample in real time, with no instances of false positives. Further, both approaches, and especially the Markov-switching model, yielded significant improvement over the NBER in the speed with which business cycle troughs were identified. In addition to suggesting that business cycle dating rules are an informative tool to use alongside the traditional NBER analysis, these results provide formal evidence regarding the speed with which macroeconomic data reveals information about new business cycle phases.

Keywords: Turning Point, Markov-Switching, Dynamic-Factor Model, Vintage Data

JEL Classification: C22, E32

Suggested Citation

Chauvet, Marcelle and Piger, Jeremy M., A Comparison of the Real-Time Performance of Business Cycle Dating Methods (March 2005). FRB of St. Louis Working Paper No. 2005-021A. Available at SSRN: https://ssrn.com/abstract=760966 or http://dx.doi.org/10.2139/ssrn.760966

Marcelle Chauvet (Contact Author)

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

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