PREDICTING CYCLICAL TURNING-POINTS WITH LEADING INDEX IN A MARKOV SWITCHING MODEL

We have evaluated the Commerce Department's Composite Index of Leading Indicators as a predictor of business cycle turning points using the two-state Markov switching model as the filter. Contrary to some recent studies, we found that the predictive performance of CLI is quite good and, with an exception of the 1973:11 peak, it made very little difference to the prediction of turning points whether real-time data are used instead of the revised series. We found, however, that imposing any degree of autoregression in the errors on the simple regime-shift model caused the filter to signal turning points inappropriately. Also, we found no evidence of duration dependence in post-war U.S. business cycles.