Identifying US business cycle regimes using dynamic factors and neural network models

Abstract

We use dynamic factors and neural network models to identify current and past states (instead of future) of the US business cycle. In the first step, we reduce noise in data by using a moving average filter. Then, dynamic factors are extracted from a large-scale data set consisted of more than 100 variables. In the last step, these dynamic factors are fed into the neural network model for predicting business cycle regimes. We show that our proposed method follows US business cycle regimes quite accurately in sample and out of sample without taking account of the historical data availability. Our results also indicate that noise reduction is an important step for business cycle prediction. Furthermore using pseudo real time and vintage data, we show that our neural network model identifies turning points quite accurately and very quickly in real time.

Publication
In Journal of Forecasting
Baris Soybilgen
Baris Soybilgen
Assistant Professor in the Department of Management Information Systems

Economist with a strong focus in applied econometrics and data science.