We extend the model by including a self-adjusting variable-bandwidth filter, which enhances signal-to-noise ratio cycles.
Figure 1 also compares the probabilities of recession from the DFMS model with and without the self-adjusting variable-bandwidth filter. For the model with the filter, the probabilities of recessions detect only major recessions, but in the model without the filter the probabilities also capture several other minor contractions in addition to the major recessions for some G7 countries.
We extend the Markov-switching dynamic factor model by adding a self-adjusting variable-bandwidth filter. The model yields output probabilities of the current business cycle phase for each G7 country and for the aggregate OECD and G7 output measures, which can be used as a warning system to monitor country-specific and international business cycles.