FIXED VERSUS TIME-VARYING TRANSFER-FUNCTIONS FOR MODELING BUSINESS CYCLES

Transfer function models can be used to model the relationship between leading indicators and the business cycle. The traditional transfer f unction approach assumes that the pure delay (lead) as well as the oth er parameters of the model are constant. Results from studies on Swedi sh business cycle data indicate that the relationship between the lead ing indicators and the business cycle may be time varying. In this pap er the traditional approach is compared to a recursive estimation proc edure that allows the model to change over time. The results show that the recursive procedure is useful and that the estimates of the model parameters indeed vary over time.