posted on 2006-01-30, 18:03authored byTerence Mills, Ping Wang
We estimate a model that incorporates two key features of
business cycles, comovement among economic variables and
switching between regimes of boom and slump, to quarterly
U.K. data for the last four decades. Common permanent and
transitory factors, interpreted as composite indicators of
coincident variables, and estimates of turning points from one
regime to the other, are extracted from the data by using the
Kalman filter and maximum likelihood estimation. Both
comovement and regime switching are found to be important
features of the U.K. business cycle. The components produce
sensible representation of the cycles and the estimated turning
points agree fairly well with independently determined
chronologies.
This paper forms part of the ESRC funded project (Award No.
L1382511013) “Business Cycle Volatility and Economic
Growth: A Comparative Time Series Study”, which itself is
part of the Understanding the Evolving Macroeconomy
Research programme.