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van Os, Bram
van Dijk, Dick
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2020-057/VI
The dynamic factor Markov-switching (DFMS) model introduced by Diebold and Rudebusch (1996) has proven to be a powerful framework to measure the business cycle. We extend the DFMS model by allowing for time-varying transition probabilities, with the aim of accelerating the real-time dating of turning points between expansion and recession regimes. Time-variation of the transition probabilities is brought about endogenously using the accelerated score-driven approach and exogenously using the term spread. In a real-time application using the four components of The Conference Board’s Coincident Economic Index for the period 1959-2020, we find that signaling power for recessions is significantly improved and are able to date the 2001 and 2008 recession peaks four and ten months before the NBER.
Business cycles
generalized autoregressive score models
time-varying transition probabilities
turning points
Document Type: 
Working Paper

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