Abstract: Before macroeconomic fluctuation, the leading indicators will give early warning signal which precautions the macroeconomic direction. Based on Markov-switching model with time-varying transition probabilities (MS-TVTP), this paper measures if term spread has the early warning effect on China’s business cycles phase transitions. We firstly calculates correlation coefficients between various of term spread and SW index which reflects macroeconomic fluctuation, finding that the correlation coefficient for the spread between the 15-year and 2-year bond spot rate and the SW index are the highest one. Introducing it into MS-TVTP model, the outcome shows that the corresponding transition probability will change according to fluctuation of term spread, which indicates that our economy switches from one phase to the other. Based on our model, we argue that the contraction probability will increase gradually in the recent days.  

Key Words: Term Spread;Business Cycle;Phase Transition;MS-TVTP Model