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Business cycle forecasting and regime switching

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  • Thórarinn G. Pétursson

Abstract

This paper applies Hamilton's (1989) Markov-switching model of business cycle dynamics to real GDP in Iceland for the period of 1945 to 1998. The resulting model gives a reasonable description of the data generating process for real GDP and produces business cycles that correspond quite well to conventional wisdom concerning the Icelandic business cycle. Although the model cannot be distinguished from a simple, linear time series model, it offers some improvements in terms of mean absolute forecast errors and in forecasting business cycle turning points to the official forecasts made by the National Economic Institute.

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  • Thórarinn G. Pétursson, 2000. "Business cycle forecasting and regime switching," Economics wp07, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp07
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    Cited by:

    1. Bjarni G. Einarsson & Kristófer Gunnlaugsson & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2015. "The long history of financial boom-bust cycles in Iceland - Part I: Financial crises," Economics wp68, Department of Economics, Central bank of Iceland.
    2. Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "On our own? The Icelandic business cycle in an international context," Economics wp63, Department of Economics, Central bank of Iceland.
    3. Thórarinn G. Pétursson, 2018. "Disinflation and improved anchoring of long-term inflation expectations - The Icelandic experience," Economics wp77, Department of Economics, Central bank of Iceland.

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