Business cycle dynamics with duration dependence and leading indicators

Layton, Allan P. and Smith, Daniel R. (2007) Business cycle dynamics with duration dependence and leading indicators. Journal of Macroeconomics, 29 (4). pp. 855-875. ISSN 0164-0704

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Durland and McCurdy (1994) investigated the issue of duration dependence in US business cycle phases using a Markov regime switching approach, introduced by Hamilton (1989) and extended to the case of variable transition parameters by Filardo(1994). 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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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Deposited in accordance with the copyright policy of the publisher.
Faculty / Department / School: Historic - Faculty of Business - No Department
Date Deposited: 11 Oct 2007 01:13
Last Modified: 29 Jul 2013 01:56
Uncontrolled Keywords: business cycle; duration; leading indicators; regime shift; multinomial logit
Fields of Research : 14 Economics > 1402 Applied Economics > 140212 Macroeconomics (incl. Monetary and Fiscal Theory)
14 Economics > 1403 Econometrics > 140303 Economic Models and Forecasting
14 Economics > 1403 Econometrics > 140305 Time-Series Analysis
Socio-Economic Objective: E Expanding Knowledge > 97 Expanding Knowledge > 970114 Expanding Knowledge in Economics
Identification Number or DOI: 10.1016/j.jmacro.2006.02.003

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