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 recen t studies, we found that the predictive performance of CLI is quite go od and, with an exception of the 1973:11 peak, it made very little dif ference 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. busines s cycles.