Business cycle dynamics with duration dependence and leading indicators

Article

Layton, Allan P. and Smith, Daniel R.. 2007. "Business cycle dynamics with duration dependence and leading indicators." Journal of Macroeconomics. 29 (4), pp. 855-875. https://doi.org/10.1016/j.jmacro.2006.02.003
Article Title

Business cycle dynamics with duration dependence and leading indicators

ERA Journal ID18290
Article CategoryArticle
AuthorsLayton, Allan P. (Author) and Smith, Daniel R. (Author)
Journal TitleJournal of Macroeconomics
Journal Citation29 (4), pp. 855-875
Number of Pages21
Year2007
Place of PublicationNetherlands
ISSN0164-0704
1873-152X
Digital Object Identifier (DOI)https://doi.org/10.1016/j.jmacro.2006.02.003
Web Address (URL)https://www.sciencedirect.com/science/article/abs/pii/S0164070407000298
Abstract

Durland and McCurdy (1994) investigated the issue of duration dependence in US business cycle phases using a Markov regime switching approach, introduced by Hamilton (1989) and extended to the case of variable transition parameters by Filardo(1994). In Durland and McCurdy’s model duration alone was used as an explanatory variable of the transition probabilities. They found that recessions were duration dependent whilst expansions were not. In this paper, we explicitly incorporate the widely accepted US business cycle phase change dates as determined by the NBER, and use a state-dependent multinomial Logit modelling framework. The model incorporates both duration and movements in two leading indexes - one designed to have a short lead (SLI) and the other designed to have a longer lead (LLI) - as potential explanatory variables. We find that doing so suggests that current duration is not only a significant determinant of transition out of recessions, but that there is some evidence that it is also weakly
significant in the case of expansions. Furthermore, we find that SLI has more informational content for the termination of recessions whilst LLI does so for expansions.

Keywordsbusiness cycle; duration; leading indicators; regime shift; multinomial logit
ANZSRC Field of Research 2020380112. Macroeconomics (incl. monetary and fiscal theory)
380203. Economic models and forecasting
380205. Time-series analysis
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Byline AffiliationsFaculty of Business
Simon Fraser University, Canada
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