A new turning point signalling system using the Markov switching model with application to Japan, the USA and Australia

Abstract

A new business cycle turning point signalling system is proposed and examined by using Japanese, US and Australian composite indexes of economic activity. Time varying transition probabilities in a Markov regime-switching model are used as the basis of the signalling system. The performance of the system is satisfactory, though its reliability varies between peaks and troughs and across countries. Based on data up until May 1998, the system suggests the absence of turning points in any of the three countries in 1998.