The Philippine business cycle and yield curve: a MArkov regime switching and OLS approach
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2012-03
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Abstract
There is a dearth of studies on the business cycle of the Philippines, much less are papers on the Philippine yield curve and how it performs as an indicator of inflections in the business cycle. This study aims to identify turning points and transition probabilities of the business cycle using the Markov Regime Switching Model with four autoregressive lags AR(4), determine the number of relevant regimes, and then look into the predictive ability of an OLS model of the yield curve on real GDP growth using all available data on year-on-year quarterly real GDP growth and Treasury Bill Yields. Results indicate that a Markov Regime Switching Model with three regimes fit the data with good estimates of smoothed probabilities and that the difference of the yield of 364-day and 91-day T-Bills lagged by four quarters suffice as independent variables in the OLS model.
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Keywords
Business cycle, Yield curve, Markov regime switching