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. A common factor, interpreted
as a composite indicator 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 composite indicator produces
a sensible representation of the cycle and the estimated turning points agree fairly
well with independently determined chronologies. These estimates are sharper than
those produced by a univariate Markov switching model of GDP alone. A fairly
typical stylised fact of business cycles is confirmed by this model - recessions are
steeper and shorter than recoveries.
This is Business Cycle Volatility and Economic Growth
Research Paper No. 01/1.