Advantages of the CMI model
In the CMI model, you have only one ∆P index to follow the economic situation.
A great number of macroeconomic dynamics models were proposed in the past decades of systematic research of economic cycles: structural (neoclassic, neo-Keynesians, etc.), non-structural (econometric and others with no theory) and various combinations of both. The main advantage of structural models is the ability to explain economic trends and changes, while the main drawback is the impossibility of analyzing an economy in real time. The main advantage of non-structural models is the ability to analyze an economy in real-time. But because of the lack of theory, they generate unexpected false or misleading signals when identifying the turning point in macroeconomic dynamics.
Although various models significantly differ from each other, one can highlight some common drawbacks that can partially explain the inability to forecast starting points of economic crisis accurately. Those drawbacks primarily include:
- multiple assumptions that simplify the reality of things (perfect competition, price and wage flexibility, ceteris paribus, etc.) and create a local model, i.e. model which is applicable to specific market conditions;
- there is a time lag when identifying macroeconomic dynamics turning points, i.e. those points identification is only possible post-factum as the input statistic data for models characterizes the state of an economy in the past only;
- there are false and misleading signals when identifying recessions’ starting point.
With the model of macroeconomic dynamics, we are able to avoid noted drawbacks that are inherent in both typical structural (theoretical) and non-structural (econometric) models.
According to the CMI model combination of gains in economic growth, production efficiency, money supply, and inflation provide fundamentals for price trend direction in these markets. However, shifts in monetary policy and other regulators’ activity, psychological, and force major factors are able to strengthen or weaken these fundamentals temporarily.
The competitive advantages of the CMI model
Therefore, the competitive advantages of the CMI model are:
- Every critical point of the CMI model can be identified well in advance before its statistical confirmation, i.e., with “the time lead period”. This period is the time between the date of origin of a recession and the official date of its beginning. The time lead period appearance in the CMI model is explained by forecasting within this model not the final output directly (as seen in most traditional models) but the stimuli to produce this output. It lets us forecast statistical future events in an economy using statistical data from the past. The time lead period duration is about 6-12 months which provides enough time for economy or business regulation by use of available instruments.
- One more distinctive feature of the CMI model is the exogeneity of market prices (P). It means that the actual market price is a result of the effect of all market factors at every moment in time. This exogeneity provides the ability to adequately describe macroeconomic dynamics under any combination of market conditions. That is, within the framework of the CMI model, we do not need to accept any assumptions that limit the scope of its use (ceteris paribus, flexibility-inflexibility of prices and wages, the perfection of competition, the neutrality of money, etc.), which are inherent in well-known structural models of macroeconomic dynamics. Thus, the CMI model could be applied to all kinds of market conditions and any economy.
- No false signal has been observed for the US economy since 1970 (or for six real recessions in a row) that our forecasting accuracy of the US recession starting (ending) point is 100%.
- Anticipating the moment when the U.S. economy accelerates (decelerating) between recessions.
In summary, the CMI model has the advantages of well-known economy models while avoiding their drawbacks, which allows analysis of an economy in real (calendar) time with a better understanding of the current economic situation, mostly avoiding unexpected and incomprehensible shifts in macroeconomic trends, and false and misleading signals of the model regarding these shifts.