The Economic Climate Index with Asymmetric Feature in China

Economic climate index is widely used to depict the macroeconomic running station. In the modern methods to construct the composite index, dynamic factor model is the most influential one. Considering the structural change in business cycle´s upward and downward phases, the mathematical models constructed to compute the climate index monitoring the business cycles should involve the Markov switching mechanism which is used to describe the asymmetric features in business cycles. This paper will introduce the dynamic factor model with Markov switching and try to construct the macroeconomic climate index with asymmetric feature through this model. The result of this paper shows that the business cycle of the new expansion stage in China, contrast to the contraction stage, has the characteristics of longer expansion duration and smaller amplitude.