Monitoring Business Cycles with Structural Breaks

Marcelle, Chauvet and Simon, Potter (2007): Monitoring Business Cycles with Structural Breaks.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Recession, Instability, Bayesian Methods, Probit model, Breaks.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

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