Heinrich, Markus Carstensen, Kai Reif, Magnus Wolters, Maik
Year of Publication:
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2017: Alternative Geld- und Finanzarchitekturen - Session: Forecasting E17-V3
We use a Markow-switching dynamic factor model with three states for Germany with indicators selected by the Elastic Net. The states represent expansions, normal - and severe recessions. Adding a third state helps to identify all business cycle turning points in-sample and in real-time. Combining the factor and the recession probabilities with a GDP forecasting model yields accurate nowcasts and a correct prediction of the timing of the Great Recession and its recovery one quarter in advance.