Direct Versus Indirect Approach to Estimates Euroarea Business Cycle Fluctuations

• Activity Number: 19
• Type: Topic Contributed
• Date/Time: Sunday, July 29, 2012 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Gian Luigi Mazzi*+ and Monica Billio and Laurent Ferrara and Filippo Moauro
• Companies: Eurostat and University of Venice and Bank of France and Eurostat
• Keywords: business cycle ; growth cycle ; turning points ; markov switching model

Abstract

Realtime detection of turning points for business and growth cycles is essential to ensure a reliable monitoring of the cyclical situation and to construct an effective early warning system. Considering the business and growth cycles, turning points follow the ABCD sequence. In a detecting exercise, the fulfilment of the ABCD sequence is not ensured if turning points indicators are developed independently. This happens when the two indicators have different leads and lags respect to the turning points. The alternative is to construct a single indicator detecting simultaneously growth and business cycles. A new multivariate indicator based on Markov Switching model is presented, for the Euroarea cycles turning points. Main methodological issues are discussed: the selection of a variables set relevant for both cycles and the identification of the number of regimes in the multivariate specification. The new indicator is compared in realtime with the univariate ones. The main outcome of the exercise is that the multivariate indicator is timelier in detecting turning points. The results show the potential of the new indicator, even if further work is needed to reduce false signals.