A New Indicator Based on Neftçi's Approach for Predicting Turning Points of the Euro-Zone Growth Cycle

Abstract

Summary" [...] in many situations a decision does not have to be made immediately, but can be delayed until additional information has been acquired. Sequential analysis seems particularly applicable to the problem of predicting turning points in the business cycle" (Palash and Radecki, 1985). Elaborating on this idea, we propose a new approach to predict cyclical turning points in the Euro-zone using the Neftçi's approach. The output is a probability index for a forthcoming economic turning point.

Detecting Cyclical Turning Points

“…Classical leading composite indices are often constructed as a weighted average of normalized leading indicators. The COE approach is different (see Anas (1997) and Anas and Nguiffo-Boyom (2001)). We start with the idea that the combination of statistical information is easier to perform in the space of probabilities than in the space of time series.…”

“…A second approach consists in detecting the TPs of various leading economic time series and aggregating the corresponding probabilities in order to provide a signal for a future TP (Anas, 1997, andNguiffo-Boyom, 2001). As an alternative, a multivariate Markov-Switching model could be applied directly to the set of leading time series.…”