Carstensen, Kai
[VerfasserIn]
;
Heinrich, Markus
[Sonstige Person, Familie und Körperschaft];
Reif, Magnus
[Sonstige Person, Familie und Körperschaft];
Wolters, Maik H.
[Sonstige Person, Familie und Körperschaft]
Predicting Ordinary and Severe Recessions with a Three-State Markov-Switching Dynamic Factor Model. An Application to the German Business Cycle
Erschienen in:CESifo Working Paper Series ; No. 6457
Umfang:
1 Online-Ressource (43 p)
Sprache:
Englisch
DOI:
10.2139/ssrn.2978514
Identifikator:
Entstehung:
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments April 2017 erstellt
Beschreibung:
We estimate a Markow-switching dynamic factor model with three states based on six leading business cycle indicators for Germany preselected from a broader set using the Elastic Net soft-thresholding rule. The three states represent expansions, normal recessions and severe recessions. We show that a two-state model is not sensitive enough to reliably detect relatively mild recessions when the Great Recession of 2008/2009 is included in the sample. Adding a third state helps to clearly distinguish normal and severe recessions, so that the model identifies reliably all business cycle turning points in our sample. In a real-time exercise the model detects recessions timely. Combining the estimated factor and the recession probabilities with a simple GDP forecasting model yields an accurate nowcast for the steepest decline in GDP in 2009Q1 and a correct prediction of the timing of the Great Recession and its recovery one quarter in advance