Dating Lower Turning Points of Business Cycles – A Multivariate Linear Discriminant Analysis for Germany 1974 to 2009

Abstract

This paper examines with multivariate linear discriminant analysis (LDA) the accuracy of dating lower turning point phases (LTP) of a four-phase classification scheme of German business cycles from 1974 to 2009, in particular why the start of the Great Recession (GR) is dated so late. Based on quarterly year-to-year rates of change, 85% of LTP periods are classified correctly, which is the lowest rate of the four phases but is not different from the results for previous periods. The misclassification of the start of the GR as an upper turning point phase (UTP) and thereby skipping the DOWN phase seems to be the result of a rare coincidence of outliers of influential classifiers. The re-estimation of the classification functions with quarter-to-quarter rates of change showed promising results; however, they also failed to classify the start of the GR correctly.