Measuring U.S. business cycles: A comparison of two methods and two indicators of economic activities

Subtitle:

Article type: Research Article

Authors: Ahking, Francis W.

Affiliations: Department of Economics, Oak Hall, Room 332, The University of Connecticut, Storrs, CT 06269-1063, USA. Tel.: +1 860 486 3026; Fax: +1 860 486 4463; E-mail: [email protected]

Abstract: We examine two issues in business cycle research. We first compare the performance of Hamilton's Markov-Switching (MS) model and the Bry and Boschan algorithm in replicating the US business cycle features. A number of studies, especially Harding and Pagan, have demonstrated that Hamilton's nonlinear MS model do not replicate business cycle features better than simpler linear models. Second, we compare the ability of the U.S. real GDP and a relatively new coincident index of four economic indicators, published by the Federal Reserve Bank of Philadelphia, in replicating features of the U.S. business cycle. We find that Hamilton's MS model is not robust when compared to the Bry and Boschan algorithm with respect to different sample periods and to different measures of real income. Second, we also find that a constructed quarterly version of the coincident index is slightly preferred over the real GDP.

Keywords: Markov-switching model, Bry and Boschan algorithm, business cycle dating

DOI: 10.3233/JEM-150407

Journal: Journal of Economic and Social Measurement, vol. 39, no. 4, pp. 199-216, 2014