Enhanced reliability of the leading indicator in identifying turning points in Taiwan? an evaluation

Using Taiwan data, we employ Dueker's (1997, 2002) Probit-Markov switching model toevaluate the performance of Taiwan''s leading indicator in identifying turning points.The merit of the Probit-MS model is that it incorporates the dependent structure of the leading indicator which is not taken consideration in the traditional Probit model.It is unambiguous that the best forecast horizon for Taiwan''s leading indicatorin predicting business conditions is three months.The performance of Taiwan''s leading index in identifying turning points based on the Probit-MS model is greatly enhanced when compared with that based on the Probit model,and beyond this, the model-identified business cycle dates are highly consistent with the officially identified turning points.