Working Papers 2002 – Abstracts
Non-linear Modelling of the Australian Business Cycle using a Leading
Indicator
Roland G. Shami and Catherine S. Forbes
This paper develops a new non-linear model to analyse the business cycle
by exploiting the relationship between the asymmetrical behaviour of the
cycle and leading indicators. The model proposed is an innovations form
of the structural model underlying simple exponential smoothing that is
augmented by a latent Markov switching process. Furthermore, the probabilities
that drive the Markov process vary with the growth of the leading indicator.
The proposed model is used to analyse the Australian business cycle using
the gross domestic product as a proxy and the industrial materials prices
index as the exogenous leading indicator influencing the transition probabilities.
Model parameters are estimated using a Gibbs sampling algorithm and subsequently
used for forecasting purposes.
Keywords: Structural model; Markov switching regime;
Gibbs sampling; Business cycle; Leading indicator.
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