Been plagued by lacklustre growth that has turned

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been plagued by lacklustre growth that has turned resistant to a plethora of unprecedented non- conventional monetary and fiscal stimuli. More recently, there has been growing concern among academics and policy-makers about a new recessionary phase. This concern is not confined to U.S. and the Euro Area. Based on the latest adverse global economic developments, influenced by the outbreak of a new disease in China associated to a new coronavirus, and spread around the globe, international organizations, such as the IMF and the OECD, have downgraded to outlook of the world economy. 1 Given the looming danger of a new global downturn, the need for a framework to infer the strength of the world economy in real-time is as high as ever. Given two of the main defining characteristics of business cycles, which are comovement across real activity indicators and nonlinear dynamics resembling up and downturns ( Burns and Mitchell ( 1946 )), previous works have proposed econometric frameworks that account for these features when inferring recessionary episodes. In particular, Markov-switching dynamic factor (MSDF) models have been successfully used to account for comovements and nonlinearities in a unified setting. Introduced by Chauvet ( 1998 ), MSDF models where initially applied to a set of U.S. real activity indicators at the monthly frequency with the aim of summarizing such information into a single index subject to regime changes, showing its ability to identify turning points in a timely fashion. 2 Other works have focused on extending such a framework to operate in the context of mixed-frequency data, to include information on quarterly real GDP ( Camacho et al. ( 2014 )) or on nominal GDP ( Barnett et al. ( 2016 )). In the context of MSDF models, the common factor summarizing the information in a set of activity indicators is assumed to have an unconditional mean associated to expansions, μ exp , and another unconditional mean associated to recessions, μ rec . Following Hamilton ( 1989 ), previous MSDF models have assumed that μ exp holds for all the expansions, and that μ rec also holds for all recessionary episodes, included in the sample. However, this assumption can be highly restrictive, in particular, if recessions are considerably heterogeneous over time in terms 1 In February 22nd 2020 the IMF decreased 0.1% global growth, IMF ( 2020 ). Only a week later, on March 2nd the OECD decreased global growth in 0.5%, OECD ( 2020 ). 2 Chauvet and Piger ( 2008 ) rely on a similar model, however, it is estimated with Bayesian instead of classical methods. ECB Working Paper Series No 2381 / March 2020 3
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of deepness. For example, assuming that μ rec does not vary across recessions could preclude the model to accurately infer an upcoming ‘mild’ recession after having only observed a ‘severe’ recession, as happened in most advanced economies after the Global Financial Crisis. Hence, although MSDF models allow for a timely assessment of turning points by relying on a set of indicators, they might be subject to a lack of accuracy when implemented in a context of heterogeneous downturns, which is typically observed at the international level.
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  • Fall '19
  • Economics, Recession, Late-2000s recession, GWI

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