Searching for a better proxy for business cycles: with supports using US data

Abstract

This study revises the original Current Depth of Recession (CDR) to prove that the Modified CDR (MCDR) is more suitable as a threshold variable than the CDR. We rebuild the CDR indicator and adjust its positive and negative ranges with the estimation results of the Threshold Autoregressive (TAR) model. We construct two TAR models utilizing CDR and MCDR as threshold variables, respectively. Estimation and test results of the root mean square error, Theil's inequality coefficient and the Diebold-Mariano (DM, 1995) test suggest that MCDR performs better as a threshold variable than CDR.