Identification and real-time forecasting of Norwegian business cycles
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We define and forecast classical business cycle turning points for the Norwegian economy. When defining reference business cycles, we compare a univariate and a multivariate Bry-Boschan approach with univariate Markov-switching models and Markov-switching factor models. On the basis of a receiver operating characteristic curve methodology and a comparison of the business cycle turning points of Norway's main trading partners, we find that a Markov-switching factor model provides the most reasonable definition of Norwegian business cycles for the sample 1978Q1-2011Q4. In a real-time out-of-sample forecasting exercise, focusing on the last recession, we show that univariate Markov-switching models applied to surveys and a financial conditions index are timely and accurate in calling the last peak in real time. However, the models are less accurate and timely in calling the trough in real time.
Also published as Working Paper Norges Bank Research 09/2015