Business confidence and cyclical turning points: a Markov-switching approach

Abstract

Markov regime-switching analysis is used to consider the relationship between business confidence and the probability of turning points in cyclical GDP. We find, in an application to New Zealand, that confidence is related to both the deepness and duration of the business cycle and is asymmetric regarding the probability of the economy remaining in a given regime. Overall, the New Zealand business confidence series is a useful indicator of cyclical turning points.

Notes

¹ Other applications of Markov switching to business survey data, although not explicitly to business confidence, include Amstad (2000) and Amstad and Etter (2000). For a survey of early-warning systems in a regime-switching context see, for example, Abiad (2003).