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Modeling of Economic and Financial Conditions for Nowcasting and Forecasting Recessions: A Unified Approach

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  • Altug, Sumru
  • Çakmaklı, Cem
  • Demircan, Hamza

Abstract

This paper puts forward a unified framework for the joint estimation of the indexes that can broadly capture economic and financiall conditions together with their cyclical regimes of recession and expansion. We do this by utilizing a dynamic factor model together with Markov regime switching dynamics of model parameters that specifically exploit the temporal link between the cyclical behavior of economic and financial factors. This is achieved by constructing the cycle in the financial factor using the cycle in the economic factor together with phase shifts. The resulting framework allows the financial cycle to potentially lead/lag the business cycle in a systematic manner and exploits the information in economic and financial variables for estimation of both economic and financial conditions as well as their cyclical behavior in an efficient way. We examine the potential of the model using a mixed frequency and mixed time span ragged-edge dataset for Turkey. Comparison of our framework with more conventional polar cases imposing a single common cyclical dynamics as well as independent cyclical dynamics for economic and financial conditions reveal that the proposedspecification provides precise estimates of economic and financial conditions and it delivers quite accurate probabilities of recessions that match with stylized facts. We further conduct a recursive real-time exercise of nowcasting and forecasting business cycle turning points. The results show convincing evidence of superior predictive power of our specification by signaling oncoming recessions (expansions) as early as 3.5 (3.4) months ahead of the actual realization

Suggested Citation

  • Altug, Sumru & Çakmaklı, Cem & Demircan, Hamza, 2018. "Modeling of Economic and Financial Conditions for Nowcasting and Forecasting Recessions: A Unified Approach," CEPR Discussion Papers 13171, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13171
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    References listed on IDEAS

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    1. Sylvia Frühwirth‐Schnatter, 1994. "Data Augmentation And Dynamic Linear Models," Journal of Time Series Analysis, Wiley Blackwell, vol. 15(2), pages 183-202, March.
    2. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Abstract: Capital Market Equilibrium in a Mean-Lower Partial Moment Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 635-635, November.
    3. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
    4. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
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    More about this item

    Keywords

    Business cycle; Bayesian inference; Markov switching; Financial conditions index; Dynamic factor model; Coincident economic index;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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