A0776
Title: Business cycle dynamics after the Great Recession: An extended Markov-switching dynamic factor model
Authors: Catherine Doz - Paris School of Economics (France) [presenting]
Laurent Ferrara - SKEMA Business School (France)
Pierre-Alain PIONNIER - OECD (France)
Abstract: The Great Recession and the subsequent period of subdued GDP growth in most advanced economies have highlighted the need for macroeconomic forecasters to account for sudden and deep recessions, periods of higher macroeconomic volatility, and fluctuations in trend GDP growth. An extension of the standard Markov-switching dynamic factor model (MS-DFM) is put forward by incorporating two new features: switches in volatility and time-variation in trend GDP growth. First, it is shown that volatility switches largely improved the detection of business cycle turning points in the low-volatility environment since the mid-1980s. It is an important result for the detection of future recessions since, according to the model, the US economy is now back to a low-volatility environment after an interruption during the Great Recession. Second, the model also captures a continuous decline in the US trend GDP growth that started a few years before the Great Recession and continued thereafter. These two extensions of the standard MS-DFM framework are supported by information criteria, marginal likelihood comparisons and improved real-time GDP forecasting performance.
