Business cycle dynamics with duration dependence and leading indicators

Layton, Allan & Smith, Daniel (2007) Business cycle dynamics with duration dependence and leading indicators. Journal of Macroeconomics, 29(4), pp. 855-875.

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Durland and McCurdy [Durland, J.M., McCurdy, T.H., 1994. Duration-dependent transitions in a Markov model of US GNP growth. Journal of Business and Economic Statistics 12, 279–288] investigated the issue of duration dependence in US business cycle phases using a Markov regime-switching approach, introduced by Hamilton [Hamilton, J., 1989. A new approach to the analysis of time series and the business cycle. Econometrica 57, 357–384] and extended to the case of variable transition parameters by Filardo [Filardo, A.J., 1994. Business cycle phases and their transitional dynamics. Journal of Business and Economic Statistics 12, 299–308]. In Durland and McCurdy’s model duration alone was used as an explanatory variable of the transition probabilities. They found that recessions were duration dependent whilst expansions were not. In this paper, we explicitly incorporate the widely-accepted US business cycle phase change dates as determined by the NBER, and use a state-dependent multinomial Logit modelling framework. The model incorporates both duration and movements in two leading indexes – one designed to have a short lead (SLI) and the other designed to have a longer lead (LLI) – as potential explanatory variables. We find that doing so suggests that current duration is not only a significant determinant of transition out of recessions, but that there is some evidence that it is also weakly significant in the case of expansions. Furthermore, we find that SLI has more informational content for the termination of recessions whilst LLI does so for expansions.

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ID Code: 45257
Item Type: Journal Article
Refereed: Yes
Keywords: Business cycle; Duration; Leading indicators; Regime shift; Multinomial logit
DOI: 10.1016/j.jmacro.2006.02.003
ISSN: 0164-0704
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > Economic Theory (140100)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Deposited On: 24 Aug 2011 22:18
Last Modified: 29 Feb 2012 13:56

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