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Working Paper
A steady-state approach to trend/cycle decomposition of regime-switching processes
In this paper, we present a new approach to trend/cycle decomposition under the assumption that the trend is the permanent component and the cycle is the transitory component of an integrated time series. The permanent component is defined as the steady-state level of the series, a definition that has exploitable forecasting implications useful for identification. We operationalize the steady-state approach for regime-switching processes and we use generated data from such processes to demonstrate the advantages of the steady-state approach over alternative approaches to trend/cycle ...
Working Paper
Contagious Switching
We analyze the propagation of recessions across countries. We construct a model that allows for multiple qualitative state variables in a vector autoregression (VAR) setting. The VAR structure allows us to include country-level variables to determine whether policy also propagates across countries. We consider two different versions of the model. One version assumes the discrete state of the economy (expansion or recession) is observed. The other assumes that the state of the economy is unobserved and must be inferred from movements in economic growth. We apply the model to Canada, Mexico, ...
Working Paper
Beyond the numbers: an analysis of optimistic and pessimistic language in earnings press releases
In this paper, we examine whether managers use optimistic and pessimistic language in earnings press releases to provide information about expected future firm performance to the market, and whether the market responds to optimistic and pessimistic language usage in earnings press releases after controlling for the earnings surprise and other factors likely to influence the market*s response to the earnings announcement. We use textual-analysis software to measure levels of optimistic and pessimistic language for a sample of approximately 24,000 earnings press releases issued between 1998 and ...
Working Paper
Identifying asymmetry in the language of the Beige Book: a mixed data sampling approach
Studies of the predictive ability of the Federal Reserve's Beige Book, an anecdotal measure of regional economic conditions, for aggregate output and employment have proven inconclusive. This might be attributed, in part, to the irregular release schedule of the Beige Book. In this paper, we use a model that allows for data sampling at mixed frequencies to analyze the predictive power of the Beige Book for both aggregate and regional data. We find that the Beige Book's national summary predicts GDP and aggregate employment, but that the information content in the district reports for regional ...
Working Paper
Permanent and transitory components of business cycles: their relative importance and dynamic relationship
This paper investigates the relationship between permanent and transitory components of U.S. recessions in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession for the ...
Working Paper
Is the response of output to monetary policy asymmetric? evidence from a regime-switching coefficients model
This paper investigates regime switching in the response of U.S. output to a monetary policy action. We find substantial, statistically significant, time variation in this response, and that this time variation corresponds to "high response" and "low response" regimes. We then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as a function of state variables. We find strong evidence that the regime shifts can be explained by whether the economy is in ...
Working Paper
The dynamic relationship between permanent and transitory components of U.S. business cycles
This paper investigates the dynamic relationship between permanent and transitory components of post-war U.S. business cycles. We specify a time-series model for real GNP and consumption in which the two share a common stochastic trend and transitory component, and Markov-regime switching is used to model business cycle phases in these components. The timing of switches between business cycle phases is allowed to differ across the permanent and transitory components. We find strong evidence of a lead-lag relationship between the switches in the two components. Specifically, switches in the ...
Working Paper
The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations
Using a Bayesian model comparison strategy, we search for a volatility reduction within the post-war sample for the growth rates of U.S. aggregate and disaggregate real GDP. We find that the growth rate of aggregate real GDP has been less volatile since the early 1980s, and that this volatility reduction is concentrated in the cyclical component of real GDP. The growth rates of many of the broad production sectors of real GDP display similar reductions in volatility, suggesting the aggregate volatility reduction does not have a narrow source. We also find a large volatility reduction in ...
Working Paper
The importance of nonlinearity in reproducing business cycle features
This paper considers the ability of simulated data from linear and nonlinear time-series models to reproduce features in U.S. real GDP data related to business cycle phases. We focus our analysis on a number of linear ARIMA models and nonlinear Markov-switching models. To determine the timing of business cycle phases for the simulated data, we present a model-free algorithm that is more successful than previous methods at matching NBER dates and associated features in the postwar data. We find that both linear and Markov-switching models are able to reproduce business cycle features such as ...
Working Paper
The economic performance of cities: a Markov-switching approach
This paper examines the determinants of employment growth in metro areas. To obtain growth rates, we use a Markov-switching model that separates a city?s growth path into two distinct phases (high and low), each with its own growth rate. The simple average growth rate over some period is, therefore, the weighted average of the high-phase and low-phase growth rates, with the weight being the frequency of the two phases. We estimate the effects of a variety of factors separately for the high-phase and low-phase growth rates, along with the frequency of the low phase. We find that growth in the ...