All conclusions for the CMI-model theory (see “The CMI model main principles” section) were empirically confirmed using the USA economy (Fig.1,2) as a pattern of a highly developed country. A period of Empirical verification of the CMI model is more than 50 years (1970-2020) or seven empirical business cycles in a row. Also, we tested our model using the Ukrainian economy (1987-2010) (Fig.3,4) as a pattern of the emerging country that proves the CMI model to be general.
Empirical verification of the CMI model
Figures 1 and 3 present the theoretical scheme of the CMI model, which was built in real time for the US and Ukrainian economies, correspondingly. They present the dynamics curves of the calculated “natural” price index (P0) and actual market price index (P) according to official statistics.
Figures 2 and 4 present real GDP dynamics for the US and Ukrainian economies, correspondingly, which were marked by critical points of the CMI model. These critical points are determined from Fig. 1, and 3, and then they are laid over the dynamics of real growth rates of the U.S. economy in Fig. 2 and the Ukrainian economy in Fig.4.
Greyed vertical columns for all the Figures here represent periods of the recession durations according to the official dating.
Fig. 1. CMI-model of macroeconomic dynamics built up for the US economy in real-time Vertical black lines are the CMI model signals for the US recession starting points. P – actual market price index (http://www.bea.gov/); P0– natural price index (calculated by author); ∆P = (P0 – P) – cumulative market imperfection. Grey columns – official duration of the US recessions (www.nber.org)
Fig. 2. Real GDP growth rate for the US economy (http://www.bea.gov/) dated according to critical points of CMI-model. Vertical black lines are the CMI-model signals for the US recession starting points, which were retrieved from Fig.5. Grey columns – official duration of the US recessions (www.nber.org)
Fig. 3. CMI-model of macroeconomic dynamics built up for the Ukrainian economy in real-time.
Vertical black lines are the CMI model signals for the Ukrainian recession’s starting and ending points. P – actual market price index (https://ukrstat.gov.ua); P0– natural price index (calculated by author); ∆P = (P0 – P) – cumulative market imperfection. Grey columns – official duration of Ukrainian recessions (https://ukrstat.gov.ua).
Fig. 4. Real GDP growth rate for the Ukrainian economy (https://ukrstat.gov.ua) dated according to critical points of the CMI model. Vertical black lines are the CMI model signals for the Ukrainian recession starting and ending points, which were retrieved from Fig.5. Grey columns – official duration of the Ukrainian recessions (https://ukrstat.gov.ua).
Comparing Fig.1 and Fig.2, as well as Fig.3 and 4, we can make the following conclusions:
- The CMI model is general, i.e. it would be applied to all kinds of market conditions and for any economy (country);
- The value of ∆P is a common and universal indicator that characterizes the initial driving force of macroeconomic dynamics (business cycle) for all market conditions and for all moments of real-time. If ∆P > 0, then there is economic growth, if ∆P < 0, then there is a recession. The points where ∆P = 0 are the turning points of the business cycle;
- We can separate external shock that leads to a recession from a shock that will be absorbed by an economy without a recession. While the value of ∆P remains positive, any internal or external shock can be absorbed by an economy without recession initiating. However, if ∆P < 0, the economic growth rate will be permanently falling and even a small shock would initiate a recession. In particular, we are able to identify for every period of real-time, whether the current regulation policy is enough to avoid recession;
- The main distinctive feature of the CMI model is that starting (ending) points of the recession can be identified well in advance before their statistical confirmation, i.e., with “the time lead period”. This period is the time between the CMI model signal about starting (ending) of the recession and its official dating. Its duration is about 6-12 months that provides enough time to use all possible instruments to regulate an economy or business;
- The greater the value of ±∆Р, the smaller the rate of economic growth is observed. The condition for maximizing the rate of economic growth (real GDP) is the approximation of the ∆Р value to zero.
Mostly, we can see economic growth deceleration just before the point of ∆Р→mах and its acceleration just after this point. The value of ∆P determines fundamental macroeconomic trend that can be strengthened (weakened) by occasional events (external or internal shocks) that makes the business cycle asymmetric in spite of a single driving force of macroeconomic dynamics;
Also, these conclusions are the competitive advantages of CMI-model. Using this model, we can decrease ambiguity and incompleteness of information used for decision making, and, in particular, to increase the accuracy of recession forecasting.