The effect of seasonal adjustment on the properties of business cycle regimes
Article first published online: 28 FEB 2008
Copyright © 2008 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 23, Issue 2, pages 257–278, March 2008
How to Cite
Matas-Mir, A., Osborn, D. R. and Lombardi, M. J. (2008), The effect of seasonal adjustment on the properties of business cycle regimes. J. Appl. Econ., 23: 257–278. doi: 10.1002/jae.980
- Issue published online: 28 FEB 2008
- Article first published online: 28 FEB 2008
- Economic and Social Research Council (ESRC). Grant Number: L138251030.
We study the impact of seasonal adjustment on the properties of business cycle expansion and recession regimes using analytical, simulation and empirical methods. Analytically, we show that the X-11 adjustment filter both reduces the magnitude of change at turning points and reduces the depth of recessions, with specific effects depending on the length of the recession. A Monte Carlo analysis using Markov-switching models confirms these properties, with particularly undesirable effects in delaying the recognition of the end of a recession. However, seasonal adjustment can help to clarify the true regime when this is well underway. These results continue to hold when a seasonally non-stationary process with regime-dependent mean is misspecified as one with deterministic seasonal effects. The empirical findings, based on four coincident US business cycle indicators, reinforce the analytical and simulation results by showing that seasonal adjustment leads to the identification of longer and shallower recessions than obtained using unadjusted data. Copyright © 2008 John Wiley & Sons, Ltd.