Forecasting business-cycle turning points: the three-times-in-succession rule vs. Markov switching

Empirically oriented business-cycle experts like to use the three-times-in-succession rule for an early identification of cyclical turning points. This rule enables them to transform the direction of a business-cycle indicator into a turning point signal. However, Markov switching models can also provide important information for the prediction of turning points. This article compares the strengths of both approaches for the forecasting of turning points in industrial activity in Germany, using the Ifo Business Climate in manufacturing as an indicator.