Applying shape and phase restrictions in generalized dynamic categorical models of the business cycle

Vol: 
25/2010
Author name: 
Harding D
Year: 
2010
Month: 
September
Abstract: 

To match the NBER business cycle features it is necessary to employ Gen- eralised dynamic categorical (GDC) models that impose certain phase re- strictions and permit multiple indexes. Theory suggests additional shape re- strictions in the form of monotonicity and boundedness of certain transition probabilities. Maximum likelihood and constraint weighted bootstrap esti- mators are developed to impose these restrictions. In the application these estimators generate improved estimates of how the probability of recession varies with the yield spread.

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