A further note on the three phases of the US business cycle

Using a number of alternative approaches, Sichel (1994) demonstrated eviden ce supporting the notion that the US business cycle is best characterized a s having three distinct phases, viz. contraction, followed by rapid expansi on during the early stages of the recovery phase, followed by a period of m ore normal expansionary growth, with the cycle then repeating itself. This contrasts with the more usual expansion/contraction, two phase characteriza tion but is more in keeping with the original notion of the business cycle as conceived by Burns and Mitchell (1946). Here an alternative approach is employed for shedding light on this issue. Following the original suggestio n of Hamilton (1989, 1990, 1991), a simple nonlinear, three phase, regime s witching Markov model is compared against its simpler two phase version to determine which version is statistically more consistent with the business cycle historical evidence. The evidence seems to clearly support the three phase characterization and that this characterization yields interesting in formation on business cycle dynamics which is necessarily missed by the two phase model formulation.