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Research Topic

Forecasting and Business Cycle Analysis

The research project "Forecasting and business cycle analysis" has two main areas of research. On the one hand we analyze the factors important in explaining business cycle fluctuations. On the other hand we use these findings to make predictions about future macroeconomic dynamics.

Most macroeconomic variables exhibit strong fluctuations over the business cycle. During a recession typically inflation goes down, unemployment goes up, fewer firms enter the market, and more go bankrupt. The Great Recession of 2008/2009 has shown that such fluctuations can be large and have important welfare consequences. In this project we analyze the factors driving these fluctuations and the role that institutions and market imperfections play in propagating shocks. Do, e.g., labor market institutions like collective wage bargaining or employment protection legislation lead to stronger or milder business cycle fluctuations? The understanding of these factors is an important basis for our policy recommendations.

Beyond understanding business cycle fluctuations, projections about future macroeconomic developments are of interest to policy makers, managers and the broader public. We analyze how state of the art econometric methods and macroeconomic theory can be used to make such predictions. This includes the usage of econometric methods to efficiently process information from large datasets, the development of highly non-linear models to predict recession probabilities early on and the construction of indicators of financial market stress and uncertainty. Another part of our research agenda concerns the usage of theory-based macroeconomic models for forecasting. We link these models to the data, evaluate their forecasting precision and study how such models can be used to analyze different economic scenarios and the effects of various economic policy measures.