Working Papers 2001 – Abstracts

Capturing the Shape of Business Cycles with Nonlinear Autoregressive Leading Indicator Models

George Athanasopoulos, Heather M. Anderson and Farshid Vahid

This paper studies linear and nonlinear autoregressive leading indicator models of business cycles in OECD countries. The models use the spread between short-term and long-term interest rates as leading indicators for GDP, and their success in capturing business cycles gauged by the non-parametric procedures developed by Harding and Pagan (2001). Our preliminary findings indicate that bivariate nonlinear models of output and the interest rate spread can successfully capture the shape of the business cycle. In particular, they can capture the features of recession and the deviation of the actual path of the cycles from a triangular approximation to this path, both characteristics that other models of GDP fail to reproduce.

Keywords: Business Cycles, Leading Indicators, Nonlinear Models, Yield Spread.

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