The use of the Markov Models to identify the turning points in the business cycle

Abstract

The article presents an example of the idea of the Markov processes (chains) to identify phases and turning points in the business cycle. With regard to the business cycle, the states of the process cycle are the phases of the cycle. On the basis of a probability value of transitions between the states, moments of the process transitions between the particular phases of the business cycle can be predicted. The Markov switching models (MS) prove to be a more complex structure based on the concept of the Markov chain model ), where a value determination of the states is not required because they are unobservable and estimated by means of the model. The paper presents the possibility of employing the Markov chains methodology, as well as of the MS models for identifying and forecasting turning points in the business cycle of the Polish economy based on GDP series.