Abstract

The synthesis of the dynamic factor model of Stock and Watson (1989) and the regime-switching model of Hamilton (1989) proposed by Diebold and Rudebusch (1996) potentially encompasses both features of the business cycle identified by Burns and Mitchell (1946): (1) comovement among economic variables through the cycle and (2) nonlinearity in its evolution. However, maximum-likelihood estimation has required approximation. Recent advances in multimove Gibbs sampling methodology open the way to approximation-free inference in such non-Gaussian, nonlinear models. This paper estimates the model for U.S. data and attempts to address three questions: Are both features of the business cycle empirically relevant? Might the implied new index of coincident indicators be a useful one in practice? Do the resulting estimates of regime switches show evidence of duration dependence? The answers to all three would appear to be yes.

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