Veranstaltung
03
Jul 2017

14:15 - 15:45
IWH Research Seminar

Predicting Ordinary and Severe Recessions with a Three-state Markov-Switching Dynamic Factor Model. An Application to the German Business Cycle

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 softthresholding rule.

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Maik Wolters  (Friedrich-Schiller-Universität Jena)
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IWH conference room
Maik Wolters

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Maik Wolters is Professor of Macroeconomics at the Friedrich Schiller University Jena.

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 softthresholding 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. (read more)

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