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The Centre for Growth and Business Cycle Research

Discussion papers 2000

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Birchenhall, C. R., Osborn, D. R. and Sensier, M. (2000). ‘Predicting UK Business Cycle Regimes’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 2.  Published in Scottish Journal of Political Economy, 2001, vol. 48(2), pp. 179-195. 

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This paper uses logistic regression to construct a one-quarter ahead prediction model for classical business cycle regimes in the UK. The binary dependent variable is obtained by applying simple mechanical rules to date turning points in quarterly real GDP data from 1963 to 1999. Using a range of real and financial leading indicators, several parsimonious one-quarter-ahead models are developed for the GDP regimes, with model selection based on the SIC criterion. A real M4 variable is consistently found to have predictive content. One model that performs well combines this with nominal UK and German short-term interest rates. The role of the latter emphasises the open nature of the UK economy.