Cyclical dynamics of industrial production and employment: Markov chain-based estimates and tests

Abstract

The purpose of this paper is to understand differences in cyclical phenomena across a broad range of developed and emerging countries based on the behavior of two key economic times series—industrial production and employment. The paper characterizes the series in question as a recurring Markov chain. Univariate processes are estimated for each series individually, and a composite indicator is constructed by using information on both series. Based on tests of equality of the estimated Markov chains across countries as well as the expected times to switch between different states, we find evidence that (i) the developed and emerging economies are “de-coupled” from each other in terms of their cyclical dynamics, and (ii) the behavior of industrial production and employment growth are “de-coupled” for the emerging economies. Our results suggest new directions for the analysis of emerging economy cyclical fluctuations.