Journal
EMPIRICAL ECONOMICS
Volume 58, Issue 1, Pages 73-105Publisher
PHYSICA-VERLAG GMBH & CO
DOI: 10.1007/s00181-019-01666-9
Keywords
Dynamic factor model; Nowcasting; Real-time data; Markov-switching; Business cycle dating
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We develop a small-scale dynamic factor model for the Swiss economy allowing for nonlinearities by means of a two-state Markov chain. The selection of an appropriate set of indicators utilizes a combinatorial algorithm. The model's forecasting performance is as good as that of peers with richer dynamics. It proves particularly useful for a timely assessment of the business cycle stance, as the recessionary regime probabilities tend to have a leading property. The model successfully anticipated the downturn of the 2008-2009 recession and promptly indicated a fall in GDP growth following the discontinuation of the exchange rate floor of the Swiss Franc.
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